Many Canadian companies are switching their retirement plans to less costly defined-contribution or group RRSP arrangements in order to reduce the potential cost of providing pensions for their employees.

With DC plans and group RRSPs, the responsibility of selecting investments — generally, from a limited range of funds — rests solely with each employee. But some plan sponsors are offering a suite of tools to assist workers in their retirement planning.

And they’re wise to do so, suggests a recent report on employer-sponsored pension guidance entitled Help in Defined Contribution Plans: Is It Working and for Whom? Sponsored by global benefits consultant Hewitt Associates and Financial Engines, a California-based firm that provides third-party retirement and asset-allocation guidance to pension plan members, this study looked at the period between January 2006 and December 2008 — a good “stress test” for determining the benefits of employer-sponsored guidance in a variety of market conditions.

The study looked at investor behaviour and portfolio risks and returns during this volatile period using a data set of seven large U.S. pension plans, representing more than 400,000 individual participants and more than US$20 billion in plan assets.

Although the study considered both “do-it-yourself” and “do nothing” participants, it specifically focused on the three fastest-growing types of investment assistance in employer-sponsored capital-accumulation plans today: target-date funds, managed accounts and online advice.

The study found that, on average, the median annual return for participants using investment help was almost two percentage points (186 basis points, net of fees) higher than those who did not.

For example, a 45-year-old who uses professional investment assistance will have saved 47% more by age 65 than if he or she acts independently, the study estimated, assuming the almost 200 bps higher median annual return is maintained over the 20-year period.

In general, the study found that target-date funds appeal mostly to younger participants with shorter tenures and lower account balances, salary and contribution rates. The average participant enrolled in a target-date fund was 38, had logged roughly four years in the job and had a plan balance of less than $7,000.

Online investment advice-users also tended to be younger, but had significantly higher account balances, salaries and contribution rates compared with target-date fund users. The average age of a participant using online advice was 41, with 9.4 years of tenure and a plan balance of roughly $70,000.

According to the study, participants who had the benefit of professional guidance generally followed a more appropriate glide path in which risk starts out higher early in their careers and “glides” downward as they approach retirement.

However, those not using professional advice had higher risk levels overall, failed to adjust or rebalance their portfolios regularly and enjoyed only a minimal reduction in risk as they approach the retirement red zone. IE