Managed Accounts Provide Solution for Participant Investment Behaviors

August 24, 2006 ( - Those adopting a managed account option in their retirement plan saw an increase in equity exposure, decrease in company stock holdings, and a significant increase in returns, according to a study by the Vanguard Center for Retirement Research.

The research report explains that under a managed account program a plan sponsor selects a third-party adviser to provide independent investment advice to participants. Participants who select the managed account option provide the adviser with their financial information, risk tolerance, goals and time horizon. They authorize the adviser to set their portfolios’ asset allocations, choose investments, and monitor and rebalance their portfolios.

Vanguard examined the portfolios of nearly 12,000 participants who signed up for the Vanguard Managed Account Program (VMAP) in 2005. According to the report, 8% of participants were early adopters of a managed account program. Vanguard found few demographic differences between early adopters and non-adopters other than than the early adopters tended to be longer-tenured employees and had higher account balances.

Prior to adopting a managed account program, 15% of the participants had no equity in their portfolios. Sixty-two percent of participants in the program saw their equity exposure increase by an average of 39%, while 30% of participants saw an average equity reduction of 18%, according to the research.

After the implementation of a managed account option, nearly 90% of participants had an equity exposure between 50% and 90%. Those who saw their equity exposure fall tended to be longer-tenured males with higher account balances, while those whose equity exposure increased were mostly females with lower account balances.

Mostly attributable to the shift toward equities among managed account participants, expected portfolio returns rose 82 basis points (after fund expenses but before any managed account fee), Vanguard found. The increase in expected return was accompanied by a smaller increase in risk.

Other than increasing equity exposure, other steps managed account services take to increase returns and decrease risk may include improving allocations to mid- and small-capitalizationUS equities and international stocks, and optimizing fund and manager selection, Vanguard noted.

Additionally, managed account services decrease investment risk by reducing participants concentration in company stock investments. After implementing the managed account service, 89% of the participants who invested in company stock had 20% or less of their plan assets in company stock; only 11% of participants were above the 20% level. Prior to implementing the managed account, 70% of participants investing in company stock had more than 20% of their assets in company stock, and 6% had all of their assets in company stock.

As Vanguard pointed out, research has suggested that many participants lack the knowledge to properly manage their defined contribution retirement plan accounts. Some are too passive, while others rely too much on investments in company stock. Solutions to this problem have included enhanced education programs, lifecycle investment choices, auto plan features, and most recently, managed account services.

Vanguard suggests in its report that managed account options reduce the fiduciary liability for plan sponsors, and may even be a suitable default investment option for defined contribution plans.

The Vanguard report can be viewed here .