The Impact of Managed Accounts on Participant Savings and Investment Decisions

A total of 60,218 retirement plan participants were included in Morningstar Investment Management LLC’s updated 2022 study, “The Impact of Managed Accounts on Participant Savings and Investment Decisions.” Participants were selected for use based on available information (including age, salary, and deferral rate) and various filters (including a minimum annual salary of $10,000, a deferral rate greater than zero, and a change in deferral rate less than 25 percentage points after enrolling in the managed account service) and includes those participants that opted into and used the Morningstar® Retirement Manager^SM managed accounts service between the dates of January 5, 2007 and December 31, 2021. The managed account service provides ongoing discretionary asset allocation, investment selection, and retirement advice for retirement investors.

To download the full research paper, please go to: https://www.morningstar.com/lp/impact-of-managed-accounts-2022update.

General Disclosures: These disclosures provide important information regarding the key terms, criteria, methodology, assumptions, risks and limitations presented in the Impact of Managed Accounts study.

“Off-track” or “not-on-track” participants are defined as those participants who had a projected retirement income of less than 70% of their salary at the time they opted into the managed account service. Participants projected to have a retirement income of 70% or more of their salary are “on-track.” The projected retirement income is the result of a Monte Carlo simulation and is the income level that could achieve 70 of probability of success in the Monte Carlo simulation. In the data set, 80% of participants were forecasted to be not-on-track, while 20% were on-track.

“Self-Directors” are those participants who had less than 90% of their portfolio in an “allocation” fund, such as a target-date fund, at the time they opted into the managed account service. Participants with 90% or more of their portfolio in an allocation fund are “Allocation-Fund Users.” In the data set, 82% were classified as Self-Directors vs 18% Allocation-Fund Users.

All data presented in the study is based on the most recent information available to Morningstar Investment Management as of the date noted on the study and may or may not be an accurate reflection of current data. There is no assurance that the data will remain the same.

There are many resources available to assist with the evaluation of a particular investment strategy. The Impact of Managed Accounts study, and/or its information, data, analyses, and conclusions, alone should not be used to make an investment decision. Investing involves numerous risks, and there is always the potential of losing money. You should consult with legal, tax, financial, and/or other advisors prior to making any investment decisions.

The Impact of Managed Account study outcomes will not be representative of each individual participant's experience with a managed accounts service. Actual results may differ substantially and could include an individual client incurring a loss or having less income in retirement. Please refer to the disclosures below for important information about the assumptions and limitations of this analysis.

Investment Performance Disclosures: It is important that you understand the risks and limitations of using investment performance returns in making investment decisions. The performance data given represents past performance and should not be considered indicative of future results. Furthermore, fees, expenses, and other costs, including any applicable trading commissions, short-term fees, or taxes, negatively impact investment performance return. The purpose of including such fees and expenses is to illustrate the effect they have on investment returns for the time periods shown.

In no way should the results of this analysis be considered indicative or a guarantee of the future performance of an actual participant using Morningstar Retirement Manager or considered indicative of the actual performance achieved by an individual participant using Morningstar Retirement Manager. Actual results of an individual participant may differ substantially from the performance shown and may include an individual participant incurring a loss. Past performance is no guarantee of future results. Morningstar Investment Management does not guarantee that the results of their advice, recommendations, or the objectives of an investment option will be achieved.

Gross and Net Performance Returns: Gross performance is calculated before the deduction of all fees and expenses an investor paid in connection with advisory fees, brokerage commissions, or other expenses. Net performance is calculated using the same type of return and calculation methodology as the gross performance, but includes the deduction of any advisory fees an investor paid or would have paid in connection with their portfolio’s advisory services. The purpose of showing net performance is to demonstrate the impact of fees and expenses on performance returns.

Investment advisers make available a disclosure document (the Form ADV Part 2A “Brochure”) that includes specific information regarding fees and expenses related to their advisory services. You can obtain Brochures and/or research investment advisers and their investment adviser representatives at adviserinfo.sec.gov.

Hypothetical Performance Returns: Hypothetical performance is investment performance returns not actually achieved by any portfolio of an investment adviser. Hypothetical performance may include, but is not limited to, model performance returns, backtested performance returns, targeted or projected performance returns, and/or pre-inception returns. It also includes returns of asset classes or indexes used as a proxy for actual portfolio holdings.

Hypothetical performance returns are theoretical, for illustrative purposes only, and are not reflective of an investor’s actual experience. Hypothetical performance returns are based on historic economic and market assumptions. Actual performance returns will vary. Hypothetical performance returns do not reflect actual trading and may not reflect the impact that material economic and market factors had on the decision-making process for a portfolio. For example, the ability to withstand losses or adhere to a particular investment strategy in spite of losses are material points which can also adversely affect markets in general or the implementation of any specific investment or investment strategy.

The Impact of Managed Accounts study includes simulated analyses based on specific assumptions that present the likelihood of various outcomes of an investment in the offered strategy. Monte Carlo is an analytical method used to simulate random returns of uncertain variables to obtain a range of possible outcomes. Such probabilistic simulation does not analyze specific security holdings, but instead analyzes the identified asset classes. The simulation generated is not a guarantee or projection of future results, but rather, a tool to identify a range of potential outcomes. IMPORTANT: Projections or other information generated regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Results may vary each time the analysis is performed and over time, reflecting any changed circumstances, assumptions or variables upon which the analysis is based. Such analyses have limitations and risks to their use. Simulated analyses alone cannot determine which securities to buy or sell, or which investment strategy to utilize.

Calculation Methodologies: Performance returns in this report were calculated using a time-weighted, geometrically linked rate of return formula. Returns for periods over one year are annualized.

Time-weighted returns measure the performance (as a percent) of capital at work during each interval between contributions and withdrawals and then link that performance together to produce a return for a stated period. This calculation is designed to eliminate the effect of cash and/ or securities being added to or taken out of a portfolio. The more contributions and withdrawals that occur and the longer the time frame, the more complex the time-weighted return calculation can become.

When the time-weighted return calculation is used, the current allocations for a portfolio’s holdings were used to generate historical performance. Taxes, loads, and sales charges and any applicable trading commissions or short-term trading fees are not taken into account. If they were, the returns stated would be reduced.

Monthly total returns for portfolios calculated using the time-weighted return method are calculated by applying the ending period holding allocations to an individual holding's monthly returns. Trailing returns are calculated by geometrically linking these weighted- average monthly returns. Portfolio and holding returns are adjusted for advisory fees.

Indexes: Indexes are not available for direct investment and the performance does not reflect costs, fees or expenses associated with investing in the instruments that comprise the benchmark or index. Indexes are created to measure a specified area of the stock market using a representative portfolio of securities and may be used as a proxy for a security or asset class. Please note that indexes vary widely, and it is important to choose an index that has similar characteristics to the security or asset class it is being used to represent. In no way should the performance of an index be considered indicative or a guarantee of the future performance of an actual security, be considered indicative of the actual performance achieved by a security, or viewed as a substitute for a security. Actual results of a security may differ substantially from the historical performance shown for an index and may include an individual investor incurring a loss. Past performance is no guarantee of future results.

Investment Risk Disclosures: Other types of investments or investment strategies than those shown in this report may be more appropriate depending upon an investor's specific situation, including the investor’s investment objectives, financial status, tax situation, and risk tolerance. These disclosures cannot and do not list every conceivable factor that may affect the results of any investment or investment strategy. Additional risks will arise, and an investor must be willing and able to accept those risks. You should speak with Morningstar Investment Management to understand the risks and limitations on investing in a particular investment or investment strategy shown in this report before making investment decisions.

Principal value and investment return will fluctuate, so that an investor's shares/units, when sold or redeemed, may be worth more or less than the original investment. Investment in securities involve investment risks including possible loss of principal. Portfolio statistics change over time. Securities are not FDIC-insured, may lose value, and are not deposits or obligations of, or guaranteed by, any bank or other financial institution.

The risks associated with investing are numerous and include, but are not limited to, those listed below:

Bonds/Fixed Income: Bonds are subject to interest rate risk. As the prevailing level of bond interest rates rise, the value of bonds already held in a portfolio declines. Portfolios that hold bonds are subject to declines and increases in value due to general changes in interest rates.

International/Emerging Market Securities: Investing in international securities involves special additional risks. These risks include, but are not limited to, currency risk, political risk, and risk associated with varying accounting standards. Investing in emerging markets may accentuate these risks.

Liquidity Risk: Investments trading on an exchange may be halted due to market conditions, impacting an investor’s ability to sell a security.

Market Price Risk: The market price of investments traded on the secondary market is subject to the forces of supply and demand and thus independent of the NAV. This can result in the market price trading at a premium or discount to the NAV, which will affect an investor’s value.

Market Risk: The market prices of investments can fluctuate as a result of several factors, such as security-specific factors or general investor sentiment. Therefore, investors should be aware of the prospect of market fluctuations and the impact it may have on the market price.

Stocks/Equities: Investments in stocks involve risk and may not always be profitable. Stocks are typically subject to greater fluctuations in market value than other asset classes due to factors such as a company's business performance, investor perceptions, stock market trends and general economic conditions.

Target-Date Funds: Target-date funds typically invest in other mutual funds and are designed for investors who are planning to retire during the target date year. The fund's target date is the approximate date when investors expect to begin withdrawing their money. A target-date fund's investment objective/strategy typically becomes more conservative over time, primarily by reducing its allocation to equity mutual funds and increasing its allocations in fixed-income mutual funds. An investor's principal value in a target-date fund is not guaranteed at any time, including at the fund's target date.

Limitations: Of the participants analyzed, 100% of them were enrolled in the managed account service by opting in, meaning they actively chose to enroll instead of being defaulted into the service. This sample could skew the results toward people who value personal investing enough to pay for it, as well as those who may start out with insufficient retirement savings, and therefore may not reflect the general population at large. Further, this analysis only examines the participants’ initial enrollment interaction. This is typically when the most significant change to participants’ retirement savings and investing strategies occurs. However, by not following participants over time, we are assuming they will stay on the course set for them by managed accounts and that they will remain enrolled in the service. It is likely this will not remain true for all participants.

3. This figure quantifies the change in savings rates for participants prior to and after opting into the Morningstar Retirement Manager managed accounts service. (Total savings rates include employee deferrals and employer matching contributions. If an employer matching contribution rate was not available for a plan, those participants are not included in the savings rate calculation.) The majority of participants who were not on track increased their savings rate (71.5%) while less participants who were on-track increased their savings rates (52.3%). Changes in savings rates were not constant across age ranges, with younger participants having larger average changes than older participants. The managed account service can also provide a recommendation to a participant to delay their retirement age instead of a savings rate increase, which could be more effective for older participants. Total savings rates increased more than employee deferral rates because the managed account service considers whether a participant is achieving the maximum employer match and recommends a deferral rate increase up to the employer match amount regardless of whether the participant is on-track or not-on-track to meet their retirement goals.

5. The amount of expected wealth at retirement was determined using a time value of money (i.e., future value) calculation was used which uses as inputs the years to retirement at age 65, the expected compounded/geometric return of a participant’s estimated portfolio, total savings amount (total savings rate times income level), and the portfolio’s current balance. The expected geometric return for each participant’s portfolio prior to and after using the managed accounts service is calculated using the portfolio’s asset class exposures. The difference between these results was then projected forward to the participant’s assumed retirement at age 65. Each portfolio’s fund allocation and the participant’s savings rate are assumed to remain constant over time and a retirement age of 65 is assumed. In reality, these would likely change over time and would differ by individual participants. Participants are grouped by (i) age, (ii) Self-Directors versus Allocation-Fund Users, (iii) whether they are "on track" or "off track" for meeting the retirement goal, and (iv) annual managed account investment management fee.

The amount of annual income a participant could receive in retirement was calculated by converting the expected wealth differences into income values. The difference in wealth at retirement was divided by 25 to arrive at an assumption of the difference in income a participant would receive during retirement. This factor (25) is roughly assuming the participant takes a 4% initial withdrawal from the portfolio at retirement, where that amount is increased annually for inflation. For this calculation, forty (40) basis points was used as a proxy for the average fee assessed by a managed account provider. This analysis does not account for all portfolio costs such as fees, taxes, or expenses other than the annual investment management fee. If included, these fees would lower the potential amount of additional wealth at retirement shown in this analysis.

Overall, an average 25- to 34-year-old participant in this scenario could potentially realize an additional $4,321 in annual retirement income. The amount of annual income was found to vary by age, whether they were on- or off-track for retirement, and whether they were a Self-Director or Allocation-Fund User prior to enrolling in the managed accounts service: