Would 401(k) savers benefit from spending more of their savings on managed account services?

New research from Morningstar — a longtime evangelist for low-fee investing — suggests savers in workplace retirement plans could realize a more secure retirement if they paid for automated in-plan investment advice.

“The average person in a 401(k) plan is not making the right decisions for retirement,” said David Blanchett, head of retirement research for Morningstar Investment Management.

“The question is—where will that person get help,” added Blanchett, author of a new white paper that explores the impact of managed accounts on the savings habits and investment decisions of 401(k) savers.

Blanchett, a CFA and CFP who advised retirement plans in a previous life, sifted the data of nearly 61,000 401(k) plan participants enrolled in Morningstar's managed account platform over an 11-year period.

Participants were divvied in two groups—those whom Blanchett calls “self directors” before enrolling in the platform, and those who were previously “allocation-fund users” enrolled in pre-packaged investments like target-date funds.

Blanchett then separated participants that were not on track to retire successfully—74 percent of the sample—and those that are—26 percent. Of the body of research that explores the cost-benefits of investing in managed account platforms, Morningstar's study is the first to examine the experiences of savers in those two domains, says Blanchett.

Some of the study's findings fall within conventional wisdom. For instance, those who previously self-directed their investment strategy and were not on track to retire securely realized the largest benefits from managed accounts.

But other findings push back on a key presumption surrounding managed accounts–that they are best suited for savers closer to retirement, and not younger participants. The study shows that the average 30-year-old managed account enrollee was on track to have an extra $5,500 in annual retirement income than they otherwise would have.

“At a high level, this adds to the growing body of research showing participants need help, and that managed accounts are a viable way to help them achieve a more successful return,” Blanchett told BenefitsPRO.

Impact on investing decisions and savings rates

Savers enrolled in Morningstar's managed account platform benefit from more efficient portfolios, assumed more appropriate risk for their given situations, and used higher quality investments, the study found. The upshot is better annual investment returns. For self-directors, a hypothetical one-year return was 32 basis points higher for managed account enrollees, and 14 basis points higher than enrollees previously invested in TDFs.

But the impact of managed accounts' “nudge” on savings rates may provide for the study's most compelling evidence. Nearly three-quarters of participants who were not on track for a secure retirement increased savings rates after enrolling in Morningstar's platform. The median deferral rate increased by 2 percentage points, to 8 percent of salary. That also translated to increased utilization of employers' matching contributions: 12 percent more of not-on-track savers earned the maximum employer match after enrolling in the managed account platform.

For some—not all—managed accounts generated more wealth at retirement. After accounting for an assumed 40-basis point annual fee for managed account services, not-on-track self-directing investors saw a median increase of 15 percent in account values at retirement. Not-on-track TDF investors saw a median increase of 14 percent. TDF savers who were on track for a secure retirement saw no improvement; on-track self directors actually saw a median decrease of total savings of 1 percent, after accounting for fees.

A CFP for all

In a perfect world, every American would have access, and the cash, for a certified fiduciary financial planner.

“In absence of cost, that would be the ideal solution,” said Blanchett, who puts the cost of a CFP at about $200 an hour. “But that's just not going to happen. The math doesn't work for every single person to get a human advisor.”

At 40 basis points—which Blanchett said is a high cost for managed accounts in larger plans—a saver with $30,000 in 401(k) savings would pay about $140 annually for the platform.

That's worth paying for, thinks Blanchett, even for younger participants. In a managed account, a typical 35 year-old investor would be allocated similarly as they would be in a TDF. But the potential impact on savings habits is where the real value is actualized, he said. “If you are successfully getting younger savers to save more, the cost is worth it.”

The biggest knock on managed accounts—it was big enough to garner a critical report on the platforms from the Government Accountability Office—is their cost. Published in 2014, the report found a wide discrepancy in the cost of platforms among industry providers.

The market has seen considerable price compression since then, says Blanchett. The biggest deceases are in 401(k) plans that default participants into managed accounts.

Where providers may charge 40 basis points if participants opt-in to a platform, that cost is more commonly being lowered to 25 basis points when assets are defaulted into platforms.

As automated investment and robo platforms have pushed further into the retail and defined contribution markets, some technology purists have staked a controversial claim: Algorithms can generate better retirement outcomes than humans can, and at a lower cost without conflicts.

Blanchett is far from that camp. “By no means are we suggesting that robos are better than human advisors. But it is a question of scale. Those that are already working with an advisor outside of their plan don't need a managed account. They're best for those that don't have the assets to afford a high-caliber financial advisor.”

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