Managed accounts and TDF: better together?


While the debate remains over whether plan sponsors should offer managed accounts or target date funds in their plans, a new study suggests they shouldn’t have to choose.

For years, plan sponsors and consultants have compared the results of managed accounts and TDFs in workplace pension plans, with the idea that they should choose one or the other, which implies that they are indeed substitutes, where a participant would also be likely to use either option.

However, a new analysis from the Empower Institute, the Empower Retirement research group, suggests this is not the case. Instead, managed accounts and TDFs should be seen as complementing each other, and together they can improve the overall health of the pension plan and plan members’ retirement savings outcomes.

Research shows that including managed accounts in a DC plan results in a significant increase in the percentage of participants that end up in professionally managed solution portfolios, defined as Managed Account Portfolios or TDFs.

“There is a misconception that investors are in a prime position when it comes to managed accounts and target date funds,” says 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 research director, Dr. Zhikun Dennis Liu, studied data from more than 2.3 million members of more than 17,000 workplace pension plans. His results show that participants who use TDFs tend to be younger with lower incomes, while participants who use managed accounts tend to be older with higher incomes.

Although managed accounts and TDFs share similar attributes, the results suggest that investors do not view the two products as substitutes. “In other words, in the absence of one of these options, participants will generally not choose the other option and may end up managing their accounts on their own, which can lead to poor decision making. investment “, explains the study.

Comparing plans that offer and don’t offer managed accounts, Liu found that fewer participants are self-directed when managed accounts are offered. Of those participants using managed accounts, 80% would end up managing their investment portfolios on their own if managed accounts were not offered.

In addition, analysis of the use of TDF by participants when managed accounts are or are not present in pension plans shows that approximately 6% of additional participants end up in an investment portfolio managed by professionals. when managed accounts are offered.

“Providing managed accounts to participants could help direct some independent participants to professionally managed solutions, which could benefit approximately 50% of independent participants aged 65 or over,” the study said.

Participants using managed accounts also generally remain invested in the option. Previous research from Empower has shown that in 2020, participants tended to stay invested in managed accounts and were less likely to change their investment strategy compared to target date investors.

“We believe that including managed accounts in an occupational pension plan results in a significant increase in the percentage of plan members who end up in professionally managed pension solutions portfolios,” notes Ken Verzella, vice president of services. advisory to Empower participants. “We believe that offering these types of investment solutions with integrated advice and professional management will help Americans on the path to better savings results.”

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