Empower Retirement President Edmund Murphy III tells PLANSPONSOR he is personally very excited about the new research, published under the informative title, “The Haves and the Have-Nots.”
“I really think it’s a fresh new look into the opportunities presented by managed accounts,” he suggests. “Personally, I haven’t seen any research out there that more clearly and concisely makes the case for managed accounts. The findings are very compelling and show that managed accounts make a lot of sense from both the investing and fiduciary/cost perspective.”
Some of the topline findings make managed accounts look quite compelling indeed. Over a five year period from 2010 to 2015, Empower says managed account users enjoyed an additional 2% in average annualized returns in defined contribution (DC) plan accounts compared with those who do not use an investment allocation product. Specifically, Empower says managed account users secured a 9.77% annualized return net of fees between 4/1/2010 and 3/31/2015, compared with 7.85% for plan participants controlling their own asset allocations.
“Critically, these figures are net of fees,” Murphy explains. “We all know the focus on fees in the retirement planning industry has been a net positive for plan participants, but one thing to keep in mind is that outcomes matter just as much as pricing. We need to look holistically at returns and fees and look for opportunities where the fees may be a little higher but the performance is there to justify it.”
For this report, Murphy says a managed account is defined as a participant’s retirement plan account “which is managed by a registered investment adviser.” Different firms approach managed accounts different ways, Murphy adds, but “we’re looking in general at situations in which the investment adviser analyzes the funds available in the retirement plan and, using additional information supplied by the participant, produces a portfolio to help the participant meet his or her retirement goals.”
NEXT: Controlling emotion via managed accountsMurphy says another key point in the research is that managed accounts can help participants “take the emotion out of investing and help gain the confidence they need that the investments in their retirement plan are properly allocated.”
He says the study’s analysis shows the variance in performance consistency between the highest and lowest performing portfolios was “so much smaller for managed account users than it was for those who did not utilize such a product,” at 3.93% variance versus 11.41% variance, net of fees.
According to Empower, the variation in these annualized returns for participants not using a managed account “may attribute to underperformance over the five-year period studied.” Evidence in the study suggests that the variance may be an influential aspect of what determines annual average returns over long periods of time.
The report also offers a historical perspective of product development in the defined contribution space leading to the rise of managed accounts. A key benefit that has led to lasting popularity and innovation for managed accounts, the study says, is that as participants age their assets are re-allocated based on personal factors.
“Periodic market shifts are addressed through regularly scheduled asset allocation changes based on an individual’s information and risk tolerance,” Murphy says. “The goal is to help keep their customized strategy on track. It’s an investment approach that takes emotion out of the equation, and one that may help mitigate investment performance swings over time.”
The study was conducted by Empower in conjunction with its subsidiary Advised Assets Group, LLC, a federally registered investment adviser. The full report is available online here.