Automatic Savings Plans Drive Better Investment Returns

In the U.S., TDFs have consistently had positive gaps because U.S. investors contribute to their 401(k) savings with every paycheck, and TDFs reduce bad market timing decisions.

By Rebecca Moore | June 01, 2017
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Research from Morningstar finds automatic savings plan produce better investment outcomes for investors.

"Steady investment contributions to savings plans and automatic rebalancing proved to be key in generating positive investor returns in countries including Australia, South Korea, and the United States," says Russel Kinnel, chair of Morningstar's North America ratings committee and editor of Morningstar FundInvestor.

The "Mind the Gap 2017" study measures how the average investor fared in a fund and the impact investor behavior can have on investment outcomes. The study uses the Morningstar Investor Returns methodology to derive a dollar-weighted return of a fund that incorporates the effect of cash inflows and outflows from purchases and sales, as well as the increase in a fund's assets. The "gap" refers to the shortfall between funds' money-weighted and time-weighted returns, reflecting how opportunely investors have timed their investments.

During the five-year period through December 31, 2016, the study found that investor returns across the globe varied from stated returns, on average, by a range of -1.40% to 0.53% per year. However, investors achieved better outcomes when using systematic investment programs and invested in lower-cost funds.

The report says, in the U.S., allocation funds had positive gaps. The link across these markets were automatic investment plans. In the U.S., target-date funds (TDFs) have consistently had positive gaps because U.S. investors contribute to their 401(k) savings with every paycheck. “This is a structure that many regulators around the world are considering as a way to encourage retirement savings,” the report says.

The overall 10-year gap in the U.S. has shrunk from 55 basis points at the end of 2015 to 37 basis points at the end of 2016. Adding another year of solid market returns likely helps. A second factor that is driving the aggregate gap lower over the long haul is that yearly flows have not kept pace with the growth in assets under management. Thus, in the aggregate mutual fund investors are making fewer market-timing calls that can harm results.

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