New analysis of returns from managed accounts shows participantswho are using the option often have a substantial advantage overthose who don’t, according to a study published by Empower Retirement.

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In “The Haves and the Have-Nots: What is the Potential Value ofManaged Accounts,” the industry’s second largest recordkeeperexamined the account performance of more than 315,000 participantsin almost 1,800 plans, from 2010 to 2015.

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The average annualized return from managed accounts was 9.77percent, net of fees, compared to 7.85 percent for participants whodon’t use a managed account option.

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Moreover, participant accounts without managed optionsexperienced a wide discrepancy in rates of returns.

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The data shows a spread of nearly 11.5 percent between the best-and worst-performing non-managed accounts.

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But managed accounts experienced substantially less volatilityin their performance—only about a 4 percent spread between the bestand worst performing accounts.

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Empower’s study, which was conducted with its subsidiary RIA,Advised Assets Group, suggests the difference in both the extrareturns seen in managed accounts, and the widevariance in returns with non-managed accounts, is largely explainedby behavioral finance.

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Ed Murphy, president of Empower, saysmanaged accounts can neutralize participants’ natural instinct forloss aversion, which can influence the stasis so often experiencedin non-managed accounts.

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That fear can keep savers in a poorly balanced strategy.

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“Managed accounts can take the emotion out of investing,” saidMurphy in an interview. “More and more, participants are showingthey want help designing and managing a strategy. A managedapproach can give participants the confidence they need thatinvestments in their plan are properly allocated.”

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Murphy said Empower is seeing growth in terms of the number ofplans adopting a managed option and the number of participantsactually enrolling in them. Because of their relative novelty inthe market, previous comparisons have been hampered by limiteddata.

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But this year’s study incorporated data from 64 percent moreplans and 159 percent more participants than last year’s study, asmore savers have been enrolled in managed accounts long enough tobe eligible for review.

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That suggests a more accurate accounting of how well managedaccounts are faring, said Murphy.

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“The results are convincing,” he added. “Look at the compoundingeffect of an annual difference in 200 basis points. Over aparticipant’s lifetime, it can mean an astronomical increase inretirement savings.”

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Fees are important, underscored Murphy, because he thinks anexcessive preoccupation with cost can have the adverse affect ofparticipants overlooking the need to understand their risk profile.That can result in volatile, and often lack-luster, returns.

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Earlier this year, Cogent Reports, the financial services researcharm of Market Strategies International, released research showingone-fifth of plans with at least $500 million in assets aredefaulting participants into managed accounts.

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That’s a notable increase from just last year, when only 5percent of such plans were doing so.

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As adoption has grown, and as more record keepers and advisorscreate managed products for the market, some have suggested they are poised to replacetarget-date funds as the next evolution in plandesign.

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Murphy is skeptical of that theory, and says both options willhave their place for the foreseeable future, as different investorswill be attracted to different strategies.

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But he does say the conventional target-date strategy is“outmoded.”

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“Take two 40-year-old participants. One has saved, the otherhasn’t. One has a history of cancer, the other is healthy. Both areput in the same TDF with the same glide path. There’s not enoughpersonalization,” said Murphy.

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“And there is a substantial difference in the risk differentfunds with the same glide path take on. I think people purchasethem without a full appreciation of the risk involved,” hesaid.

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That said, he doesn’t see target-date funds going away. He does,however, see them evolving.

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Anecdotally, Murphy says interest in managed accounts is growingwith all types of sponsors, but that their popularity isparticularly notable among sponsors of public plans, such as stateand local governments.

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Still, challenges remain. Education on managed accounts, andtheir value proposition, remains essential.

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“We believe this new paper presents a strong empirical case forconsidering managed accounts as part of a plan sponsor’s offeringto its plan participants. We will be sharing it with bothadvisors and clients as a way to drive the discussion further,” hesaid.

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Nick Thornton

Nick Thornton is a financial writer covering retirement and health care issues for BenefitsPRO and ALM Media. He greatly enjoys learning from the vast minds in the legal, academic, advisory and money management communities when covering the retirement space. He's also written on international marketing trends, financial institution risk management, defense and energy issues, the restaurant industry in New York City, surfing, cigars, rum, travel, and fishing. When not writing, he's pushing into some land or water.