Managed Accounts Can Improve Savings Outcomes, Morningstar Finds

Participants can benefit most from utilizing a managed account, when the plan in which they are enrolled does not offer automatic features other plan design elements that boost savings outcomes, according to a recently published Morningstar report, “How Plan Design Shapes the Value of Managed Accounts.”

Co-authors Spencer Look, Morningstar Retirement’s associate director of retirement studies, and Jack VanDerhei, its director of retirement studies, found that, especially with the benefit of time, managed accounts can encourage saving in a manner similar to automatic escalation.

VanDerhei argues that companies that do not use auto-escalation will still have participants saving enough to reach a level of retirement savings to create sufficient retirement income. Rather than raise the default savings rate or increase the employer match—costly changes that would impact everyone—he says companies can take a more targeted approach.

“That trade-off is between … a more generous benefit formula for everybody, versus a managed account taking care of those [retirement savers] that currently don’t … have everything that the employer thinks they need to be sufficient,” VanDerhei says.

The researchers built off their January report, which used Morningstar’s Defined Contribution Outcomes Model to determine hypothetical account balances based on a range of plan design and participant choices, as well as previous research showing that managed accounts’ asset allocation plays “a secondary but still meaningful role.” While managed accounts are often criticized for high fees, the Morningstar report found that, net of fees, managed accounts boosted the median wealth-salary ratio at age 65 by an average of 7.7%—specifically, managed accounts improved the ratio by 5.9% when compared with the savings of target-date-fund investors and 11.4% against do-it-yourself investors. The youngest cohort of retirement savers, aged 20 through 24, were projected to have even better outcomes from the use of managed accounts—9.9% more than TDF investors and 22.2% more than DIY investors.

Look and VanDerhei next wanted to see how three additional factors impacted the efficacy of managed accounts: default contribution rates ranging from 3% through 6%, a variety of employer matches, and automatic escalation versus no escalation.

Participants in plans without escalation got much more value from a managed account offering, regardless of participant age or other plan design features. The authors concluded that contribution growth over time was the primary driver of managed account value.

When considering default contribution rates, lower rates made the use of a managed account more valuable, according to the paper.

“If you’ve got auto-enrollment with auto-escalation and a really high default, a lot of the value that managed accounts could add is probably already there,” VanDerhei says.

Younger participants benefited the most, given they had more time for managed accounts to improve their contribution behavior and for their gains to generate compound interest.

“There’s a value not only from the asset allocation, but from the employee contribution lift that’s compounding year after year,” VanDerhei says. “That gives you 40 years to benefit from it, as opposed to just a couple if you’re already in your retirement age.”

Similarly, the authors found that managed accounts’ effects were more significant when compared with a DIY baseline, rather than a TDF, since TDFs reduce variable behavior among participants. Managed accounts also improved contribution behavior in plans with automatic enrollment but without auto-escalation.

An employer match was found to have a more limited effect on managed accounts, but the authors wrote that this was an “intuitive finding,” given that many managed account users save at rates higher than the level required to receive their employer’s full match, often through “self-selection or managed account recommendations.”

For next steps, VanDerhei says he is currently working on “the ultimate in granularity,” investigating the effects of participant job changes and any resulting plan transitions on the benefits of managed accounts. The study will also see how loans, pre-retirement withdrawals and TDF-managed-account hybrids affect participant balances, resulting in a paper comparing dozens of plan designs.

“If you can figure out a coherent way of doing 43 different plan designs and publishing those results, please let me know,” VanDerhei says. “My editor is already yelling at me.”