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Are Managed 401(k) Accounts Worth the Cost?

Of course the realized benefits will vary by participants and fees charged for the service, but a new white paper suggests that there is strong evidence for using managed accounts.

In fact, two potential outcomes for defined contribution plan participants who use managed accounts are higher savings rates and more-efficient portfolios, better preparing them for a successful retirement, according to the paper by Morningstar.

In “The Impact of Managed Accounts on Participant Savings and Investment Decisions,” David Blanchett, head of retirement research for Morningstar Investment Management and author of the paper, explores the impact of managed accounts based on the savings and investment behaviors for nearly 61,000 of the firm’s DC participants from January 2007 to June 2018.

Participants were divided into two groups based on investing and saving behaviors. For investing, participants were classified as either “self-directors,” or those building their own portfolios before entering managed accounts (71% of participants), and “allocation-fund users,” or those using a prepackaged multi-asset allocation strategy, such as a TDF (29% of participants).

For savings, participants were classified as either those forecast to be “not-on-track” to retire successfully (74% of participants) and those who were “on-track” to retire successfully (26% of participants).

Not surprisingly, the research found that participants most likely to benefit include those self-directing investors who are not currently on track to retire successfully. “We found that not-on-track self-directors in our study tend to realize the largest benefit from managed accounts, on average, while on-track allocation-fund users realized the smallest benefit, on average,” Blanchett notes.

But even after incorporating a common fee for managed accounts – in this case 40 basis points or 0.4% – the average participant is still expected to have more wealth at retirement in each cohort than if participants did not use the service, according to the report.

The Impact

The change in median expected annual returns for participant portfolios after entering managed accounts was +27 basis points for self-directors and +4 basis points for allocation-fund users. On a risk-adjusted basis, the median differences were +19 basis points for self-directors and +12 basis points for allocation-fund users.

Savings-rate behaviors were significantly different based on whether the participant was forecast to retire successfully. Blanchett notes that the majority of participants who were not on track decided to increase savings rates (71.5%) after entering managed accounts, while the majority of participants who were on track did not change savings rates (64.8%).

“These differences are notable because the savings impact of managed accounts is likely to vary significantly based on the retirement readiness of the participant population,” he explains in the report.

And for those who need to save more, deferral rates on average increased by 2 percentage points to 8% of income for not-on-track participants — a 33% increase, according to the findings.

Additionally, among participants in plans that offered an employer match, the percentage who received the maximum employer match increased by 12% for not-on-track participants versus a 1% increase for on-track participants.

More Wealth at Retirement?

The paper further suggests that most participants, when entering managed accounts, would be expected to have more wealth at retirement – especially ones who were not on track for retirement success. Not surprisingly, the research found that the percentage of participants who are better off declines at higher assumed fee levels.

Again, using an annual assumed 40-basis-point fee, the report shows that the expected median increase in wealth at retirement is +15% for not-on-track self-directors, and +14% for not-on-track allocation-fund users. There was no difference, however, for the on-track allocation-fund users and -1% difference for on-track self-directors.

Due to the benefits of compound growth, younger participants would probably realize more annual income in retirement from managed accounts than older participants, the report observes. “If we focus on the youngest age group (25 to 34), we could generally assume that the average 30-year-old participant using a managed accounts service would increase his or her retirement income by $8,232, on average, assuming no managed fee, and $5,548 assuming a 40-basis-point managed accounts fee,” Blanchett notes. These correspond to percentage increases of 72% and 56%, respectively, he adds.