Plan sponsors who adopt a managed account advisory service in their defined contribution retirement plan can improve outcomes for plan participants, according to a study by Vanguard Research.
Plan sponsors choose a third-party adviser to provide independent investment advice to plan participants for a fee. The adviser takes a retirement plan’s existing investment lineup and creates a diversified portfolio that takes into consideration an employee’s expected retirement date, risk tolerance and other factors.
The study, The value of managed account advice, found that most participants who adopt managed account advice realize value in some form, either through higher projected retirement wealth due to expected returns and savings or because of reduced risk exposure that results in lower expected returns and projected retirement wealth but better portfolio diversification.
Cynthia Pagliaro and Stephen Utkus, the report’s authors, assessed the value of a managed account advisory service, based on its impact on portfolio allocations, savings levels and the investment management and advice fees paid by the participant.
Six in 10 participants who used managed account advice increased “their projected 10-year retirement wealth by an average of 30%” because of higher expected returns and increased savings rates, the study found.
Three in 10 participants earned value from managed accounts because of a reduction in portfolio risk. “While participants’ portfolios are better diversified, that risk reduction leads to lower expected returns and retirement wealth because of reduced equity exposure,” according to the research.
More than one-third of participants who took advantage of managed account advice through their employer-sponsored retirement plan upped the amount they were saving in their plan at the time they received the advice. One-third of participants chose to increase their savings rate by an average of 3 percentage points. Seven percent of participants reduced their contribution rate after choosing an advice service, Vanguard found.
Use of a managed account advice service also reduced the amount of company stock in these participants’ portfolios, from 46% to 4% as a result of managed account advice.
The report evaluated 40,000 participants who adopted the Vanguard Managed Account Program between 2009 and 2013 for its research. At the end of 2013, 35% of the plans Vanguard provides recordkeeping services for used the service, with 69% of participants in those plans having access to the service. It did find that only 7% of those participants actually used the service.
Participants in the study averaged 46 years old and were at their current job around 12 years at the time of managed account enrollment.
Paula Aven Gladych is a freelance writer based in Denver.
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