Managed accounts are rapidly becoming a centerpiece of the modern 401(k). Fidelity data shows that access to the once-niche service has surged from 17% of plans in 2014 to 42% by 2023, reflecting a massive push by plan sponsors to offer personalization at scale.
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Yet, as adoption grows, a central question remains: Does the personalization alpha justify the added cost for the average saver? New research from Morningstar’s Center for Retirement & Policy Studies offers an answer.
Using a sophisticated new microsimulation called the Defined Contribution Outcomes Model (DCOM), researchers analyzed millions of participant observations to quantify the value of managed accounts relative to target-date funds and self-directed portfolios.
Across all participant types, adopting a managed account led to a 7.7% increase in the wealth-to-salary ratio at age 65 for the typical investor. This metric measures retirement readiness by comparing a projected account balance to final annual earnings. A ratio of 8, for instance, means an individual has saved eight times their ending salary. By increasing this ratio, the model suggests managed account users retire with more capital relative to their lifestyle needs than those in target-date funds or self-directed portfolios.
However, the data reveals that the “who” and the “when” of adoption may matter far more than the service itself.
The ‘DIY’ vs. ‘TDF’ divide
The study’s most striking disparity appears when comparing managed accounts to the two primary ways people currently save: TDFs and do-it-yourself (DIY) portfolios.
For the typical TDF investor, the leap to a managed account yielded a 5.9% boost in projected retirement wealth. But for DIY investors, the impact was nearly double, at 11.4%.
“DIY investors see a larger boost from adopting an MA than do TDF investors,” the researchers wrote. “This result reflects, among other things, the wider dispersion in DIY investor holdings, with many portfolios widely deviating from more standard age-based asset allocations.”
Researchers noted that the range of equity holdings for self-directed investors aged 60 to 64 can be as wide as 57%, suggesting many older workers are taking on far more (or less) risk than is expected in standard models.
Still, the primary driver of these gains isn’t just better stock picking. It’s human behavior. The researchers found that MA users consistently save more than their peers, even after controlling for age, wage and tenure. The personalized nudge — a recommendation tailored specifically to a participant’s salary and goals — appears to be a more effective motivator than generic plan literature.
The early adoption bonus
Conventional wisdom often suggests that managed accounts are for complex financial lives, generally encompassing older employees with high balances who are nearing retirement. The Morningstar data suggests the opposite.
The benefits of managed accounts are most pronounced among the youngest cohorts. For investors aged 20-24, adopting an MA increased the median wealth/salary ratio by 10% for TDF users and 22% for DIYers. Researchers wrote that those gains are driven by the “compounding effect of higher savings rates over longer time horizons.”
The same pattern holds for job tenure. Participants with zero years of service saw an 8% boost if they were TDF investors, compared to just 3.9% for those with 25 or more years of service.
“The tenure results highlight that MAs can have the greatest influence early in a plan participant’s experience … [when they] typically have a lower savings rate,” the researchers wrote. “Moreover, newer plan participants also have lower starting balances (and smaller dollar fees, at least at first), which is another driver behind the larger gains that we observe.”
Tackling the auto-escalation rebuttal
One of the sharpest criticisms of managed accounts is that their savings advice is redundant in plans that already feature auto-escalation, a design in which a participant’s savings rate increases by 1% every year automatically.
Investigating that claim, researchers found that while the projected wealth gains were smaller in plans that already used auto-escalation, they remained positive. Specifically, target-date fund investors in these automated plans saw a 2.7% increase, compared to an 11.6% boost in plans that lacked an escalation feature.
“Auto-escalation does not eliminate the incremental behavioral lift generated by the savings guidance,” the researchers wrote.
Even in relatively optimized plan designs, roughly 92% of TDF investors were still projected to be better off with a managed account.
The cost of personalization
Of course, these gains are not free. The simulation modeled managed accounts at a cost of 40 basis points (0.40%) per year. When combined with underlying fund fees, the total cost for an MA investor was 71 basis points, compared to just 30 basis points for a standard TDF.
The 7.7% overall wealth increase cited by Morningstar is net of these fees, meaning the behavioral and investment improvements were large enough to overcome the higher price tag.
While managed accounts may not be a silver bullet for retirement savers, researchers say they can “meaningfully improve projected retirement outcomes across a wide range of plan participant characteristics and plan designs.”
“While the magnitude of improvement varies, the impact of adopting an MA is consistently positive, even for plans with an automatic-escalation feature,” they wrote. “These findings underscore the importance of incorporating behavioral and plan-level heterogeneity when evaluating the role of personalization in DC plans.”
