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Smaller 401(k) Plans Beat Larger Ones: Study

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Average 401(k) plan scores by plan size. Source: Judy Diamond AssociatesBigger isn’t always better, especially when it comes to companies that provide 401(k) plans to their employees.

A new survey by Judy Diamond Associates finds that smallest 401(k) plans outperform the largest plans when both investment returns and participant engagement are factored in. One thing sets them apart: education.

On Judy Diamond’s 100-point rating scale, plans with 10 or fewer participants had an average score of 63.8, whereas the plans with 100 or more participants scored 52.3.

Judy Diamond, a research firm that provides 401(k) plan data for advisors, scored the plans using an algorithm that compares each plan to similar plans nationwide on measures like investment returns, plan participation rates, contribution levels and certain signs of distress.

The giant plans, with 500 or more participants, covered 73.4% of all participants, but they only represent 2.9% of plans. Micro plans with 1 to 10 participants comprised 1.4% of participants but include 37% of all plans. The numbers basically show that the smaller groups have access to stronger plans.  

Is this a revelation? Not to Jay Wells, an accredited investment fiduciary at Foresight Wealth Management who has been an advisor for the past seven years. “The results don’t surprise me at all, and the reason is because education is the biggest factor on how well an employee does on a plan,” Wells tells ThinkAdvisor. “With a larger plan, it’s hard to manage that; in small company you’re able to sit with the employees one-on-one.

“Too many people get hung up on quality of investments and fees, and while important, education is a big part of the success,” Wells adds.

Advisors to the biggest plans need to keep looking for ways to improve performance, said Eric Ryles, managing director of Judy Diamond Associates, in a press release. “By increasing automatic enrollment, restructuring their company match, and increasing participant education, a small portion of large plan sponsors can have a huge impact on the way we save for retirement,” he said.

JDA provides data for advisors, and Ryles says that many advisors question the best way to educate people. He believes that technology is a useful tool, but personal advice is still best. “To have someone on site, at least once a year who can be available to speak with helps it becomes more cost prohibitive,” he said.

However, as helpful as this might be, it doesn’t happen often with larger firms.

Wells also agrees with automatic enrollment. “Auto-enrollment takes the human nature out of the equation,” he says. “Most employees don’t act to get in, and so they won’t act to get out.” He also adds that it’s important to understand that the performance of the investor is more important that the actual investment. “With investing, it’s a long-term approach; we’re meeting with employees regularly and are able to help them through the course of the investment. If you’re not there to help make changes for them, they can get off course.”

Most people are more inclined to make changes to their 401(k) plans when they receive their annual statement, so advisors need to be receptive to their needs at that time.

“Right after their letter arrives is when people are most receptive to that kind of thing,” Ryles said.

Overall, providing good education to plan participants is hard. Even if you prepare and make available materials, not many people will understand them and take the lessons to heart, Ryles said. “Like an employee handbook, how much of that stuff do you actually internalize?”

Another salient point to remember is that advisors should focus on providing the right type of education. Both Wells and Ryles agree the information should be tailored to the client’s specific career group.

“For example, an attorney firm might be a little more involved and thus not need a lot of information,” Wells said, “whereas in blue-collar companies we might tailor it to where they’re at.”

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