A new study concludes that participants defaulted into managed accounts save more than those defaulted into a target-date fund.
In fact, the study – drawn from a seven-model study based on a dataset of 66,297 participants from 195 defined contribution plans recordkept by Charles Schwab that offer either a target-date fund or managed accounts as the plan default investment – estimates that participants would save 0.5% more on average if defaulted into a managed account versus a TDF.
“The Impact of the Default Investment Decision on Participant Deferral Rates: Managed Accounts vs. Target-Date Funds,” by Morningstar’s David Blanchett and Daniel Bruns, notes that those increased savings benefits were likely to outweigh the costs of managed accounts, especially for participants with smaller account balances (since the managed accounts fee is typically based on the account balance).
In drawing those conclusions, the researchers note that the “average” participant, who is assumed to be 45 years old, does not roll over a previous 401(k) balance, and stays in the plan for five years, would benefit from using a managed account as long as the fee were 2.4% of total assets or lower. “In other words,” they explain, “the potential value of the higher deferral rate is worth an annual fee of approximately 2.4%,” an amount they said was “significantly higher than the fees charged by the majority of managed accounts providers,” which they said tend to be less than 0.5%.
As has been noted in other research, Morningstar notes that plans with default savings rates of less than 6% are likely to have lower average savings rates than plans with voluntary enrollment (although they have higher levels of participation). The researchers note that they found “considerable differences in the dispersion of equity allocations for participants in TDFs versus managed accounts, with the dispersion being much greater in managed accounts, especially for older participants.” They say that this suggests managed accounts “can meet the needs of more plan participants than the one-size-fits-all approach of target-date funds.”
Overall, while many DC plan consultants and plan sponsors view the selection of TDFs versus managed accounts as an investment decision, this research would suggest there are important savings considerations as well.
Other conclusions:
- The median DC plan participant defaulted into a managed account saves 2% of salary more, on average, than the median participant defaulted into a TDF, at 6% and 4%, respectively.
- At the median plan level, defaulted managed accounts participants saved 1% of salary more than those defaulted in TDFs, at 6% and 5%, respectively.
That said, and while they note that while much of the difference can be explained by different attributes of participants in plans that utilize managed accounts as the default (versus TDFs), specifically that plans with managed accounts as the default tend to have older participants with higher levels of plan tenure and higher salaries – attributes that are all associated with higher savings levels – after controlling for these variables and other important plan characteristics, individuals defaulted into managed accounts still tend to save about 0.5% more for retirement, although the level differs by model (i.e., regression), ranging from 0.3% to 1.9%.
One other factor worth bearing in mind (considering the source of the research): The managed accounts providers were either Morningstar Investment Management LLC, or GuidedChoice, Inc.
