Managed Accounts May Drive Higher Wealth Values
Managed account utilization could increase wealth value, finds new research from Morningstar.
The firm’s Center for Retirement and Policy Studies reports that managed accounts may increase the median wealth-to-salary ratio. Using its new quantitative framework, the Defined Contribution Outcomes Model (DCOM), the firm analyzes participants under two scenarios: one where participants invest in target-date funds (TDFs) or self-directed portfolios, and the other where participants adopt managed accounts at 40 basis points per year. The model then compares the median retirement wealth-to-salary ratio at age 65.
With this analysis, the Center reports larger increases at age 65 by 5.9% for target-date fund (TDF) investors and by 11.4% for self-directed (DIY) investors, with an overall increase of 7.7% across all participants.
Participants who adopt managed accounts earlier on reap the most substantial benefits, Morningstar reports. Those who began participating between ages 20 to 24 saw a rise of 9.9% for TDF investors and 22% for DIY investors. In comparison, older participants experience more moderate increases of 3% for TDF investors and 7.5% of DIY investors.
Other groups who experienced higher gains include lower- and middle-income participants (categorized as participants earning less than $100,000), whose wealth-to-salary ratios increased by 4.3% for TDF investors and 10.9% for DIY investors. This is because lower-income participants have lower savings rates and balances, therefore smaller increases in contributions could trigger higher wealth gains, Morningstar explains. Higher-income participants, who are older and are likelier to save more, would instead see minor relative gains.
The type of plan design participants enroll in could also prove impactful. Morningstar’s analysis divided plans into three categories: voluntary enrollment, automatic enrollment without auto-escalation, and auto-enrollment with escalation. It found that managed account usage improved retirement outcomes across all three plan designs, with the median wealth-to-salary ratio increasing by 6.7% for TDF investors and 11.7% of investors in voluntary enrollment plans. Auto-enrollment plans without escalation also offered substantial growth at 11.6% for TDF and 18.5% for DIY investors, and smaller rates of improvement for 2.7% of TDF and 7.8% of DIY investors for auto-enrollment with escalation plans.
Overall, 92% of automatic enrollment plans showed improved projected retirement wealth for TDF investors.
“We find that [managed accounts] boost outcomes for retirement investors, including those in plans with an auto-escalation feature. The magnitude of the impact varies meaningfully across plans and participants, driven by the heterogeneity in demographics, behavioral patterns, and plan features,” Morningstar wrote in its research.
Managed accounts have seen steady adoption in recent years by participants seeking more personalized investing. A report from Fidelity found that the number of plans providing a workplace managed account service continually increased from 17% in 2014 to 42% in 2023.
Morningstar’s newest report is the first in a series of studies set to evaluate the success of managed accounts in defined contribution (DC) plans.
According to the firm, its DCOM framework “integrates predictive equations for savings rates and asset allocations, estimated from a large dataset of millions of participant-level observations across thousands of plans, which control for participant demographics, such as age, wage, and tenure, and plan design features, such as matching formulas, auto enrollment, voluntary enrollment, default savings rates, and auto-escalation.”
Amanda Umpierrez is the Managing Editor of 401(k) Specialist magazine. She is a financial services reporter with nearly a decade of experience and a passion for telling stories and reporting news. She is originally from Queens, New York, but now resides in Denver, Colorado.