Managed accounts are convenient, customized and client-centric, and help “guide employees on how much save, how to invest their savings, and when to retire,” according to Morningstar.
Of course, not all are created equal, but what about their all-important performance?
David Blanchett, head of Retirement Research for Chicago-based Morningstar, took a look at the latter, and after breaking potential managed account users into various subgroups came to some interesting conclusions.
“There has been significant growth in internet and other online solutions over the past 15-plus years, providing a key source of information for saving and investment decisions,” he wrote. “Managed accounts, one type of automated solution, or robo-advisor, has been available to participants in defined contribution (DC) retirement plans for more than a decade.”
In a recently released paper titled “The Impact of Managed Accounts on Participant Savings and Investment Decisions,” Blanchett and his team explored the impact of Morningstar’s managed accounts platform on savings and investment behaviors for 60,825 DC participants from January 2007 to June 2018.
They considered two “domains,” investing and saving, and divided participants into two groups.
Investing
For investing, participants are classified as either “self-directors,” or those building their own portfolios before entering managed accounts (71 percent of participants), and “allocation-fund users,” or those using a prepackaged multi-asset allocation strategy, such as a target-date fund (29 percent of participants).
Saving
For savings, participants are classified as either those forecast to be “not-on-track” to retire successfully (74 percent of participants) and those who were “on-track” to retire successfully (26 percent of participants).
“We found that not-on-track self-directors in our study tend to realize the largest benefit from managed accounts, on average, while on-track allocation-fund users realized the smallest benefit, on average.”
Even after incorporating a common fee for managed accounts (40 basis points, or 0.4 percent), he added, the average participant might still be expected to have more wealth at retirement in each cohort than if participants did not use the service.
For example, he claims “the average 30-year-old participant had $5,548 more annual income during retirement, which is a 56 percent increase.”
“Overall, the analysis strongly suggests that managed accounts [have] the potential to improve retirement outcomes for DC participants, while the potential benefit will vary by participant attributes and product fees.”
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
