Lobster or cracked crab for lunch: Both are delicious, and how do you choose between them?
Maybe you don’t have to, and maybe that’s how advisors should start thinking of managed accounts and target-date funds.
For years plan sponsors and advisors have compared the outcomes of managed accounts and TDFs within workplace retirement plans. The thinking was that they should choose one or the other to offer retirement plan participants. As Coleman’s girlfriend said in the final scene of the ’80s Eddie Murphy/Dan Akroyd movie Trading Places, “Can’t we have both?”
New research and analysis from Empower Institute, the research group of Empower Retirement, shows that managed accounts and target date funds instead complement each other and together can improve investors’ retirement savings outcomes.
“There is the misconception that investors have an either-or situation when it comes to managed accounts and target date funds,” said Luis Fleites, Director of Thought Leadership at Empower. “On the contrary, our analysis shows that the two types of investments really complement each other and can help investors optimize their retirement savings.”
“Our analysis shows that the two types of investments really complement each other and can help investors optimize their retirement savings.”
Luis Fleites, Empower
Empower’s director of research, Dr. Zhikun Dennis Liu, Ph.D., studied data from more than 2.3 million participants in more than 17,000 workplace retirement plans. His findings show that participants who use target date funds tend to be younger with lower incomes while participants who use managed accounts tend to be older with higher incomes. He found that fewer participants self-direct when managed accounts are offered.
Of those participants using managed accounts, 80% would end up self-directing their investment portfolios if managed accounts were not offered.
“We believe that including managed accounts in a workplace retirement plan results in a significant increase in the percentage of participants who end up in professionally managed retirement solution portfolios,” said Ken Verzella, Vice President of Participant Advisory Services. “We believe offering these types of investment solutions with embedded advice and professional management will help get Americans on the path to better savings outcomes. We want to put workers in the best position to have a secure and comfortable retirement.”
Key findings:
- Roughly 6% more participants end up in a professionally managed investment portfolio when managed accounts are offered, and the overall effect increases for older participants.
- Data show that including managed accounts in a workplace retirement plan significantly increases the percentage of participants using a professionally managed portfolio.
- Offering managed accounts to participants could help shift some do-it-yourself participants to professionally managed solutions, which could benefit some of the approximately 50% of self-directing participants who are age 65 or older.
Managed accounts and target date funds share similar attributes, Verzella said. Managed account services are structured to be comprehensive in nature. They are designed to be a complete solution with the goal of tailoring a dynamic investment strategy to meet the evolving retirement needs of each participant.
Participants using managed accounts typically stay invested in the option. Research shows that during 2020, participants tended to stay invested in managed accounts and were less likely to change investment strategies compared to target date investors.
“What’s most important to understand from this analysis is that participants do not consider managed accounts to be substitutes for target date funds. In other words, without managed accounts as an option, participants would likely do it themselves rather than opt for a target date fund,” Liu writes in research findings.
Read the paper, “Complements, not substitutes: Together, managed accounts and target date funds improve retirement plan outcomes” here.
SEE ALSO:
• RIA Aggregation Firms Drive 401k Managed Account Adoption
• Over the Target: Custom TDFs and Managed Accounts in 401k Plans
• The Ideal Glidepath for Target Date Funds
Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.
Please see my recommendations to Congress to (1) Encourage a safe TDF as the QDIA and (2) Provide a managed account service to non-defaulted beneficiaries helping them choose among low, middle and high risk TDFs
. https://401kspecialistmag.com/a-target-date-fund-recommendation-to-congress/