Empower Institute: Managed Accounts and TDFs Better Together Than Apart

• Managed accounts and target date funds are complements, not substitutes
• Together they can contribute to improved overall retirement plan health and participant outcomes

GREENWOOD VILLAGE, Colo.--(BUSINESS WIRE)--For years plan sponsors and consultants have compared the outcomes of managed accounts and target date funds within workplace retirement plans.

The thinking was that plan sponsors and consultants should choose one or the other to offer retirement plan participants.

New research and analysis from Empower Institute¹ 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.”

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 percent 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.

About Empower Retirement

Headquartered in metro Denver, Empower Retirement administers approximately $1 trillion in assets for more than 12 million retirement plan participants as of June 30, 2021,² and is the nation’s second-largest retirement plan recordkeeper by total participants.³ Empower serves all segments of the employer-sponsored retirement plan market: government 457 plans; small, mid-size and large corporate 401(k) clients; not-for-profit 403 (b) entities; private-label recordkeeping clients; and IRA customers. Personal Capital, a subsidiary of Empower Retirement, is an industry-leading hybrid wealth manager. For more information please visit empower-retirement.com and connect with us on Facebook, Twitter, LinkedIn and Instagram.

1 This study uses a data set from Empower Retirement, that includes 2,371,165 participants across 17,740 plans as of June 30, 2021. Participants were segmented according to three investment strategies for the purpose of this analysis: managed accounts, target date funds (100% of portfolio), and do-it-yourself (DIY) investors. Only plans not using managed accounts as the default investment were included.

2 As of June 30, 2021. Information refers to the business of Great-West Life & Annuity Insurance Company and its subsidiaries, including Great-West Life & Annuity Insurance Company of New York and GWFS Equities, Inc. GWLA’s consolidated total assets under administration (AUA) were $1,131B. AUA is a non-GAAP measure and does not reflect the financial stability or strength of a company. GWLA’s statutory assets total $75.2B and liabilities total $73.3B. GWLANY statutory assets total $3.5B and liabilities total $3.3B.

3 Pensions & Investments Defined Contribution Recordkeeper Survey Ranking as of April 2021.