More Info, More Personalization

Studies show that managed accounts can benefit participants whose plans do not have features that boost savings, are off-track for retirement or have changing financial preferences and circumstances. But those benefits hinge on the accounts following through on their promise of personalization.

The case for managed accounts is that they offer customization beyond what the single data point of age can provide. They can only do that, however, with more information about the participant. While providers can pull input from payroll and employers to customize portfolios, external data regarding income and assets—which must be provided by the participant—can move the needle significantly for retirement savers.

“We have enough information to … build a portfolio for them that will follow a glide path and lead them to a good retirement,” says Neil Gilfedder, the chief investment officer of Edelman Financial Engines. “But the more they tell us about themselves—and this tends to be as their lives become more complicated—the better we can do.”

Spouse, Outside Assets and More

The two most important data points for most managed accounts are age and salary, according to Dan Bruns, chief operating officer of retirement and director of participant advice at Creative Planning. But the more information provided about a participant’s broader financial picture, he says, the better the advice.

Specific additional data points that are most beneficial vary from one participant to another, but Gilfedder says information about a participant’s spouse—and whether the spouse is working and has their own retirement plan—can be especially useful.

“You want to make sure you’re aggregating that for a household situation,” Gilfedde says, adding that it is also important to know about outside accounts and income, such as a pension, that could impact a balance.

Another key data point is when the participant wants to retire, says Dennis Elliott, head of workplace investor solutions for individual investors of T. Rowe Price. Without any input, accounts often default to age 65 or 67.

Risk, Wealth Depletion Tolerance

In addition to understanding a participant’s financial situation, Elliott says managed accounts should account for individual preferences, such as risk tolerance and wealth depletion tolerance. Even for users with the same balance, age, savings rate and salary, differences in tolerance of both risk and wealth depletion can lead an investor to move meaningfully from the glide path—potentially changing equity allocation by as much as 10 percentage points.

However, balance-to-salary ratio will affect allocation, Elliott adds, independent of an investor’s risk preference. Someone with a lower balance-to-salary ratio should receive a higher equity allocation and generally need to take on more risk, while those with higher ratios can afford to be more conservative. Depending upon scenarios, that could be a difference of about 5 percentage points in equity allocation.

As participants get closer to retirement, Elliott says it becomes more important to understand their spending goals, since they impact how much and for how long participants need to save—decisions with which participants can struggle. Any managed account will be sharper and better for the participant if the participant has a handle on what they will spend in retirement, including fixed and variable expenses, as well as whether they want to leave some assets instead of spending them all.

“The more time investors would spend on that early on, the better their retirement income plan would be, which would mean the better their managed account or the investment advice would be for them,” Elliott adds.

Difference in Engagement

Ideally, engagement also happens as life changes.

“In a perfect world, participants engage with their plans—and by extension, their managed accounts—every time their life changes—meaning marriage, children, divorce, homeownership, etc.,” says Drew Maresca, vice president of research for the Defined Contribution Institutional Investment Association’s Retirement Research Center.

Preferably, participants would log into their plan websites or engage with their managed account whenever they are prompted to do so, Maresca says. A recent Morningstar report found that participants are more likely to engage when they understand what their plan is doing for them “in plain language” and when they know that help is available and accessible.

As participants age and their financial lives become more complicated, managed accounts’ personalization can become especially useful. Elliott says that while his firm does not see much variance in terms of savings rates or assets saved for people in their 20s, that changes when people reach their 40s and 50s.

That dispersion of amounts saved, salary and savings rates “really starts to create some different opportunities for glide path,” he says.