It's easy to think of retirement savings options as a lineup of distinct choices, each standing alone. When we talk about target date funds and managed accounts, the common instinct is to pit them against each other, as if you have to pick just one. Plan sponsors and consultants often benchmark them this way, implying they're interchangeable substitutes. But what if that's not the whole story? What if, instead of being rivals, they're actually partners in building a more secure retirement?
My dive into some recent research suggests exactly that. It turns out that these two professionally managed solutions, while sharing a common goal, aren't really substitutes at all. In fact, they seem to be complementary, and when offered together, they can significantly boost the overall health of a retirement plan and, more importantly, improve outcomes for participants.
Think about it: both target date funds and managed accounts start with a similar premise. They look at your years until retirement and build an investment portfolio that's designed to become more conservative as you get closer to that big day. They're brilliant at overcoming that common hurdle of 'participant inertia' – that tendency to just stick with the default or do nothing at all. Plus, they automatically rebalance, taking the guesswork out of maintaining the right mix of investments.
But here's where managed accounts offer something a little extra. They bring a layer of personalization that target date funds, by their nature, can't quite match. This personalization can be passive, meaning it uses the data already available about you through your retirement plan to fine-tune your investments without you lifting a finger. Or, it can be active, allowing you to provide additional information that might influence how your portfolio is constructed. It’s like having a financial advisor who knows your situation intimately, even if you don't actively engage with them every day.
What's also fascinating is how participants behave when managed accounts are an option. The research indicates that people tend to stick with managed accounts more persistently, especially during volatile market periods. During the market turbulence of 2020, for instance, participants in managed accounts were less likely to jump ship or drastically alter their investment strategies compared to those solely in target date funds.
This isn't just theoretical. When you look at actual data from large retirement plans, a compelling picture emerges. Plans that offer managed accounts see a significant jump in the percentage of participants who end up in any professionally managed solution – whether that's a target date fund or a managed account. Crucially, the availability of managed accounts also seems to reduce the number of people who choose to manage their own investments entirely (the 'do-it-yourself' group). And here's the kicker: when managed accounts are introduced, the usage of target date funds doesn't really drop. People who were going to use target date funds still do. What happens is that people who might have otherwise been managing their own accounts, or perhaps not investing optimally, are drawn into the professionally managed space offered by managed accounts.
So, the next time you're thinking about your retirement savings, remember that it's not always an either/or situation. Target date funds and managed accounts can, and often do, work in tandem. They simplify complex investment decisions, help smooth out emotional reactions to market swings, and ultimately, can lead to a more robust and secure retirement journey for everyone.