According to a study by Judy Diamond Associates that analyzed the performance of DC plans, micro plans, or those with less than 10 participants, fared better than larger plans. Using a rating system that takes into account such factors as investment returns, participation rates, contributions and signs of distress, smaller firms garnered a better rating.
The reason? Advisor engagement with participants. According to a study of small plans sold through Vanguard, participant income was nearly 9% higher for direct-sold plans, while account balances for advisor-sold plans were within 1% of those sold direct — illustrating the impact of advisors.
While ratings of 401(k) plans are difficult to swallow even if you know the veracity of the data and the methodology behind it, it has not stopped Bloomberg from entering the market or kept BrightScope from catapulting into the national news. But the interesting debate that the Judy Diamond report raises is whether advisors that personally engage with participants make a bigger impact than plan design.
There’s no doubt that larger plans will have access to cheaper and perhaps better investments, more sophisticated plan design and perhaps larger matches, but participant behavior is arguably more important. For example, a plan can offer great funds but if participants buy and sell at the wrong time, the results are muted.
Though larger plans have advisors, many of them are unwilling or unable to personally engage participants, which costs a lot of money. With the overemphasis on fees, are we missing a key point here that the Judy Diamond research highlights?
