Participants With Managed Accounts Make Larger Contributions, per Morningstar

Plan advisers and sponsors are still trying to crack the code to help participants act on the understanding that saving more, via higher contributions, will help them in preparing for retirement. According to recent research from Morningstar, “Decoding Deferral Behavior in Managed Accounts,” such convincing may not be as necessary for users of managed accounts.

Authors Spencer Look, associate director of retirement studies at Morningstar Investment Management, and Jack VanDerhei, Morningstar’s director of retirement studies, conducted this research as an extension of previous research on managed accounts. Their earlier project found that managed accounts can encourage saving in a manner similar to automatic escalation. Additional research is planned to more fully explore behaviors of the studied savers over time.

In the report published yesterday, Look and VanDerhei found participants using managed accounts within voluntary enrollment plans contributed 1.2 to 2.3 percentage points more than non-users across all age groups and were also 3 to 8 percentage points more likely to contribute enough to earn the full amount of their employer’s match.

For advisers, the findings suggest managed accounts may be worth considering as part of efforts to improve participant retirement readiness.

“Managed-account users are saving at a higher rate than non-users when controlling for the factors that we can,” Look says. “If that’s a big goal, to improve retirement readiness, … [managed accounts are] clearly something to explore or consider.”

In an example from the report, among participants ages 45 through 49 in automatic enrollment plans without auto-escalation, managed account users had a predicted contribution rate of 10.7%, significantly more than the 8% rate for those without managed accounts.

“We saw a pretty clear lift in terms of wealth levels. As you can kind of expect with 1- to 2-[point]-higher contribution rates, in general, over time … it can really make a very big difference,” says Look. “It’s one of the biggest things that I tell people all the time now: Your capacity to save a bit more can really help you not worry about Social Security reform—or whatever topic [there will be to worry about] in the future for younger generations.”

The positive association between managed-account use and higher savings rates was generally smaller in plans already using automatic enrollment and automatic escalation features, suggesting those plan design elements may reduce some of the incremental impact associated with managed accounts.

“It’s pretty clear that in voluntary plans or plans with less automatic features, you would not look at the contribution rate changes as one of the main factors if you already have a lot of strong automatic components built in,” say Look.

Look also cautions that the research does not prove managed accounts are the sole cause for higher savings rates. Rather, the study found that managed-account users contributed at higher rates than non-users, even after changes in several participant characteristics.

The study’s methodology controlled for observable participant characteristics, but Look said it cannot determine whether managed accounts themselves drove higher contribution rates or whether participants who choose managed accounts were already more engaged savers.

Morningstar plans to conduct follow-up research using longitudinal data tracking the same participants over time.

“We do have a follow-up piece planned on this before and after that we’ve been arranging … That’s why we’re so trying to be as clear as we can: It’s not a causal analysis,” says Look. “We’re talking about associations.”