Those in managed accounts, target-date funds get better returns than DIY investors

'Professionals pretty much everywhere will probably outperform amateurs'

May 17, 2018 @ 10:49 am

By Robert Steyer

Defined contribution plan participants who use managed accounts or target-date funds enjoy better investment returns net of fees than participants who invest on their own, said a survey by record-keeper Alight Solutions.

Over a 10-year period through Dec. 31, 2016, Alight found that the average annualized return for participants consistently using managed accounts was 3.66%; the average annualized return for "consistent full" target-date funds was 3.65%; and the average for consistent non-users was 3.39%, according to a survey report.

Alight defined a consistent user of managed accounts as someone enrolled continuously for the three-, five- and 10-year periods that were part of Alight's analysis of data. A consistent target-date fund participant was someone who continuously enrolled in this option for the three periods. A consistent non-user was someone who never enrolled in a target-date fund or managed account.

The results show "professionals pretty much everywhere will probably outperform amateurs," said Robert Austin, head of research, in an interview Wednesday.

The survey examined record-keeping data of 47 Alight clients with 2.1 million participants that offer both managed accounts and target-date funds. Among those plans, 42% of participants used target-date funds, 12% used managed accounts and 46% used neither.

Although the survey didn't explore participants' motivation, Mr. Austin speculated that the use of managed accounts is still hampered by participant skepticism or about participants' reluctance to trying something that is relatively new to some plans.

The survey also found that participants tended to stick with managed accounts over time compared with target-date funds. Among workers who were enrolled in a managed account in 2007, Alight found that 26% withdrew prior to 2017. During this period, 67% of participants who had been fully invested in target-date funds were no longer fully invested by 2017. Alight defines a "fully invested" participant as someone who had 95% of his or her retirement assets invested in one or more target-date funds at the end of a year.

Mr. Austin hypothesized that as participants grow older, build larger balances and are affected by more complex financial issues, they may find that target-date funds no longer fit their needs.

Robert Steyer is a reporter at InvestmentNews' sister publication, Pensions&Investments.

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