While debate remains over whether plan sponsors should offer either managed accounts or target date funds in their plans, a new study suggests that they shouldn’t have to choose.
For years, plan sponsors and consultants have compared the outcomes of managed accounts and TDFs in workplace retirement plans, with the mindset that they should choose one or the other, implying that they are effectively substitutes, where a participant would be equally likely to use either option.
However, a new analysis by the Empower Institute, the research group of Empower Retirement, suggests that this is not the case. Instead, managed accounts and TDFs should be viewed as complementing each other and together can improve overall retirement plan health and participants’ retirement savings outcomes.
The research shows that including managed accounts in a DC plan results in a significant increase in the percentage of participants who end up in professionally managed solution portfolios, defined as either TDF or managed account portfolios.
“There is the misconception that investors have an either-or situation when it comes to managed accounts and target date funds,” says Luis Fleites, Director of Thought Leadership at Empower. “On the contrary, our analysis shows that the two types of investments really complement each other and can help investors optimize their retirement savings.”
Dr. Zhikun Dennis Liu, Empower’s Director of Research, studied data from more than 2.3 million participants in more than 17,000 workplace retirement plans. His findings show that participants who use TDFs tend to be younger with lower incomes, while participants who use managed accounts tend to be older with higher incomes.
While managed accounts and TDFs share similar attributes, the findings suggest that investors do not consider the two products to be substitutes. “In other words, absent one of these options, participants will not typically choose the other option and may end up self-directing their accounts, which may lead to poorer investment decisions,” the study explains.
In comparing plans that do and don’t offer managed accounts, Liu found that fewer participants self-direct when managed accounts are offered. Of those participants using managed accounts, 80% would end up self-directing their investment portfolios if managed accounts were not offered.
Moreover, the analysis of participants’ TDF usage when managed accounts are and are not present in retirement plans shows that roughly 6% more participants end up in a professionally managed investment portfolio when managed accounts are offered.
“Offering managed accounts to participants could help shift some do-it-yourself participants to professionally managed solutions, which could benefit some of the approximately 50% of self-directing participants who are age 65 or older,” the study emphasizes.
Participants using managed accounts also typically stay invested in the option. Earlier research by Empower shows that during 2020, participants tended to stay invested in managed accounts and were less likely to change investment strategies compared to target date investors.
“We believe that including managed accounts in a workplace retirement plan results in a significant increase in the percentage of participants who end up in professionally managed retirement solution portfolios,” notes Ken Verzella, Empower’s VP of Participant Advisory Services. “We believe offering these types of investment solutions with embedded advice and professional management will help get Americans on the path to better savings outcomes.”