Guest Contributor: Jack VanDerhei, Director of Retirement Studies, Morningstar Center for Retirement and Policy Studies

Background:

Managed accounts have consistently been shown to improve projected retirement outcomes relative to less personalized investment approaches. However, an important question has received comparatively little attention: does the value of managed accounts depend on the design of the retirement plan in which they are offered? More broadly, does plan design moderate the effectiveness of personalized retirement advice?

Findings:

To address this question, we used Morningstar's Defined Contribution Outcomes Model (DCOM) to simulate retirement outcomes for millions of defined contribution participants across thousands of employer-sponsored retirement plans. Rather than relying on a single representative plan, the analysis incorporated 43 distinct plan design prototypes developed from Morningstar's DCOM database. These prototypes represent the diversity of real-world plan designs, including differences in employer matching formulas, automatic enrollment defaults, automatic escalation provisions, and other plan characteristics. By holding participant characteristics constant while varying plan design across these prototypes, we isolated the extent to which differences in plan architecture influence the incremental value of managed accounts.

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The analysis demonstrates substantial variation across plan design prototypes. Managed accounts generate the largest improvements in projected retirement outcomes in plans with relatively weak automatic savings features, particularly those with lower default contribution rates and no automatic escalation. In these environments, personalized advice is more likely to increase participant contribution rates early in the accumulation period, allowing higher savings to compound over decades. For younger participants, these behavioral changes translated into projected increases in retirement wealth of approximately 20% to 30%.
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As plan design becomes stronger through higher default contribution rates and automatic escalation, the incremental gains attributable to managed accounts become smaller. This finding should not be interpreted as evidence that managed accounts become less effective. Rather, stronger plan design reduces the opportunity to improve participant outcomes through changes in savings behavior because many participants are already on higher contribution trajectories. Under these conditions, the incremental value of managed accounts increasingly derives from participant-specific investment allocations and the incorporation of individual financial characteristics, such as assets held outside the plan, pension benefits, expected retirement age, and other information that cannot be reflected in age-based default investment strategies.

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These findings suggest that plan design should be viewed as an important moderating factor when evaluating managed account effectiveness. Studies that ignore variation in plan architecture may overstate or understate the incremental value of personalized advice, depending on the characteristics of the plans being examined.

Bottom Line:

Plan design and managed accounts should not be viewed as competing approaches to improving retirement outcomes. Automatic plan features establish a stronger foundation for participant success, while personalized advice builds on that foundation by incorporating individual financial circumstances. Evaluating their interaction provides a more complete understanding of how retirement plans can improve long-term participant outcomes.

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Insights shared by guest contributors are their own and do not represent the views of DCIIA or the RRC. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

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