Managed Accounts — It’s Not (Just) the Allocation

 Managed accounts have been praised, criticized, and litigated — often on the theory that they’re little more than expensive target-date funds. However, a recent report actually quantifies their impact — and turns out, it’s not an investment story, it’s behavioral.

That report — inauspiciously titled “The 2026 Managed Accounts Research Series: Analyzing the Value of Managed Accounts” — was published in mid-January by Morningstar. Of course, Morningstar has a fair amount of “skin” in the managed account space — a reason, if you will, to find a favorable outcome for the design. 

And, sure enough, the analysis claims that managed accounts outperform target-date funds and the efforts of so-called “do-it-yourself” investors for — well, everyone. More specifically, the report claims that MAs increase the median wealth/salary ratio at age 65 by 5.9% for TDF investors and by 11.4% for DIY investors. Across all plan participants, adopting an MA led to an overall increase of 7.7%. Oh, and it does even better for younger participants, and lower-income individuals.

At this point, my natural cynicism kicked in — though based on my personal and significant experience working with Jack VanDerhei, one of the coauthors, over a period of decades during his long-standing tenure at the Employee Benefit Research Institute (EBRI) — well, let’s just say if Jack says something is “so,” I tend to believe him.

Following the report publication, I had an opportunity to talk with Jack (and Spencer Look, his collaborator in this effort) to better understand their model. For those who haven’t stumbled across the report, they take a significant database of actual 401(k) plan balances and activity and apply sophisticated statistical behavioral modeling techniques to project long-term outcomes based on various assumptions. While it’s not unusual for researchers to deploy statistical modelling, most suffer from a lack of actual data, not only as a baseline, but as a behavioral predictor. Which, I should add, explains (to me, anyway) why the results often don’t match up with how real people respond/react in the real world. 

All that said, this kind of modelling is also dependent on the quality of the underlying assumptions — and here none is perhaps more focused on than cost. Here the assumptions are 40 basis points cost for managed accounts (plus another 31 basis points in fund fees), 30 basis points for target-date funds, and 73 basis points for the DIY group.  Don’t like those assumptions? VanDerhei is willing to plug in different numbers.

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I also questioned whether it makes sense to model “managed accounts” generically, given the wide variation in personalization, design, and cost. Look explained that their review of roughly half a dozen managed account structures — including but not limited to Morningstar’s — showed sufficient similarity to support a generalized model. The same held true for target-date funds.

But here is the part that matters.

As important as factors like cost and asset allocation (not to mention the cost of asset allocation) are to outcomes, the report acknowledges that “…higher contribution rates are the primary driver.” The researchers further note that, “based on our analysis of the empirical data, MA users consistently save more than TDF or DIY investors, even after controlling for age, wage, tenure, and plan design features” — a pattern they say “…suggests that personalized savings-rate recommendations[i] embedded within MAs play a key role in encouraging higher savings rates.” 

While you have to go to page seven of the 19-page report to find that,[ii] to my eyes, it is the most important sentence in it.

Now, I’ve long said that while we talk about “managed accounts” as though they are a monolithic concept, they are not. There are different — in some cases, widely different — levels of personalization deployed — variations in cost and construct. Anyone who ignores these potential underlying differences in application is missing the point. 

I will admit that in considering the value of managed accounts, I had — perhaps as many of you — tended to focus more on the differences in asset allocation that might be possible if we knew more than projected retirement date — not to mention variation in the underlying costs. What I had not factored in was what the Morningstar researchers have — the application of personalization to influence and impact savings rates. 

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If managed accounts meaningfully increase savings rates — not just tweak allocations — that changes the fiduciary conversation entirely.

Because better investing matters. But saving more matters more.

• Nevin E. Adams, JD

 

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[i] It’s worth noting here that the impact is smaller, but still positive, for AE with escalation plans, with TDF investors seeing an increase of 2.7% and DIY investors seeing an increase of 7.8%. Moreover, approximately 92% of AE plans with auto-escalation show an improvement in the median projected retirement wealth for TDF investors under the MA scenario. In other words, while automated increases in salary deferrals help, those timed and personalized via the managed account platforms provide a superior result.

[ii] It IS, however, right there with the first findings. Apparently, the folks who created the executive summary didn’t view it as being as significant as I did.

The Biggest Retirement Assumption

There have been many different solutions put forth over the years to remedy the nation’s retirement ills, but regardless of your perception of the coming crisis (including those who believe such notions are overblown), there is a constant in every estimation of our retirement future.[1]

Yes, I’m talking about Social Security. Indeed, we rely on the inevitability of those benefits with a certainty generally accorded only to death and taxes (both of which play a significant role in Social Security eligibility and claiming, as it turns out).

And yet, for all its centrality in planning, Social Security faces its own funding crisis, or is projected to, according to the trustees of the program, in a report formally titled, “The 2019 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds. ” That the program will run short of funds is no secret, with the only variable being at what exact point in the future will benefits have to be reduced (it changes modestly from year to year, depending on a couple of variables).

Not only is the funding crisis well-known, the aforementioned trustees’ report acknowledges, and routinely outlines a “broad continuum of policy options that would close or reduce Social Security's long-term financing shortfall,” along with cost estimates.

Years back, when the future crisis was no less real, but somewhat less large, I had the opportunity to hear former Federal Reserve Chairman Alan Greenspan speak on the subject of “fixing” Social Security. Greenspan, who had led a commission in the early 1980s charged with solving was then a more immediate crisis of the program (believe it or not), outlined the two core elements of any serious attempt to resolve the funding shortfall:

• increasing funding (generally either by raising the withholding rates or the compensation level to which they are applied, or both); and
• reducing benefits (by raising the claiming age) or what’s euphemistically referred to as “means testing,” which effectively reduces the benefits to higher income recipients. 

So, the answer to the problem is, as the actuaries remind us, “just math,” and we needn’t choose one solution or the other; rather, some combination – as it was in 1983 – is the approach that seems the most likely outcome.

Except, of course, the answer isn’t “just” math, it’s money. And fixing it – while not hard to figure out – will cost money that those who would make that call would “rather” spend on other things. It’s also fraught – as it was in the 1980s – with political hot buttons. Social Security has long been considered a “third rail” of American politics, and politicians have been burned for merely suggesting the need for change, much less putting forth specific proposals.

That said, if there’s any aspect of this that is as widely known as the fact that there is a looming financial shortfall, it’s that the longer we put off taking steps to do so, the more difficult – the more expensive – it will be.

Yes, Social Security is most certainly the biggest retirement assumption – by individuals, retirement planners, and legislators alike. Today as we stand at the brink of the biggest retirement reform legislation in a decade – as we consider a growing number of state retirement savings mandates, and contemplate a federal expansion – we also know that as valuable, even essential, as those steps might be in broadening and deepening the success of the private retirement system – they won’t be “enough” if we don’t shore up the baseline foundation upon which the nation’s retirement security is currently predicated.

It’s time, in short, for an adult conversation about – and some adult action – to make sure that that most fundamental of retirement planning assumptions remains something we can count on.

- Nevin E. Adams, JD
 
Footnote
1. A notable exception is the Employee Benefit Research Institute's Jack VanDerhei, who routinely includes an assessment of the impact of the projected reductions in Social Security benefits if the current funding status remains unchanged. In a March 2019 Issue Brief, he notes that "when pro rata reductions to Social Security retirement benefits are assumed to begin in 2034, the aggregate retirement deficit increases by 6 percent to $4.06 trillion."

First Things First

This may be the time of year when thoughts turn to stockings hung by the chimney with care, but it’s also the time of year when parents have to deal with assembling some of the things in those packages. And while Santa may have elves on staff to undertake the construction of a tricycle, dollhouse or Little Tykes airplane seesaw, in our house, that "elf" was named “Dad.”

A painful lesson learned over those years was the importance of following the instructions. No matter how self-evident the process appeared at the outset, or how much I thought I remembered assembling something similar in the not-too-distant past, lurching ahead and tackling things in the order I thought made most sense was inevitably a formula for disaster. And then there was the year some miscreant had apparently “liberated” the assembly instructions from the package. Since it was Christmas Eve by the time I discovered this, all I had to go by was common sense and the picture of the finished product on the package.

Debates about the best way to achieve retirement security often seem to resemble an assembly without a set of directions — frequently without even the benefit of an agreed-upon “picture” of what the finished product is supposed to look like.

A recent hearing held by the Bipartisan Policy Commission focused on three key threats to retirement security: longevity (the risk of outliving your resources), leakage (the distribution of retirement funds prior to retirement) and the costs associated with long-term care (LTC).

Jack VanDerhei, research director for the nonpartisan Employee Benefit Research Institute (EBRI), demonstrated the impact that each of these three events can have on retirement security. With regard to leakage, he explained that more than one in five of the middle 50% who are simulated to run short of money in retirement with leakages present would have sufficient funds if leakages were completely prevented. Unlike many who tout this as a solution, however, he took pains to acknowledge that that assumed no response from participants (such as individuals deciding to contribute less (or not at all) if they knew that they wouldn’t have access to those funds prior to retirement.

Of course, once you have attained retirement, longevity risk — the risk of outliving your resources — becomes a factor. VanDerhei noted that while nearly two-thirds (62%) of the middle 50% are simulated to have sufficient retirement income, those in the longest relative longevity quartile — who would live the longest — only had a 33% chance.

One potential solution —a qualifying longevity annuity contract, or QLAC — didn’t help much. Modeling the impact of a 25% QLAC on retirement readiness, and even among those projected to live longest, VanDerhei found increases in retirement readiness of only 6.6% for early Boomers and 9.6% for Gen-Xers. Overall — that is, with no filter for longevity — this option actually reduced retirement readiness, due to the expense of these arrangements.

As for LTC expenses, while this won’t be an issue for everyone, it can have an enormous impact on the retirement security of those who are affected. VanDerhei explained that only 17% of the middle 50% of those in the top LTC quartile (those most likely to incur those expenses) will have sufficient retirement income.

Ultimately, while each of the three highlighted elements (leakage, longevity and LTC) had an impact on retirement readiness, EBRI’s numbers indicate that a bigger threat is simply not being eligible for a workplace retirement plan. How big a difference? Well, looking at the second and third income quartiles (the “middle 50%”) of Gen-Xers, the probability of not running short of money in retirement soars from 51% to 80% when you compare those with no future years of eligibility in a DC plan to those with 20 or more years.

Put another way, regardless of which solutions are put forth to deal with issues like leakage, longevity and long-term care, they’ll be of little value to those who lack access to a workplace retirement plan.

It’s not just a matter of priority — it’s all about putting the “first thing” first.

- Nevin E. Adams, JD