Managed accounts linked to higher retirement savings rates: Morningstar

Managed accounts might provide an edge for retirement savers, new research indicates. For advisors who work with employer-sponsored retirement plans, that insight could encourage more people to sign up and start contributing. 

When defined contribution plans use managed accounts, which offer personalized investment solutions and are similar to robo advisors,  employees contribute to their retirement plans at generally higher rates, according to Morningstar research released on Aug. 25. The study, "covering millions of plan participants across thousands" of plans, was written by Spencer Look, associate director of retirement studies for Morningstar Investment Management, and Jack VanDerhei, director of retirement studies for Morningstar Investment Management.

"If managed accounts encourage participants to increase deferral rates, contribute enough to capture the full employer match, or move closer to savings rates consistent with retirement income adequacy, then their value cannot be evaluated solely through asset allocation or investment performance," they wrote. "The results suggest that managed account use is generally associated with higher employee contribution rates and a higher probability of contributing enough to receive the full employer match, but the relationship is not uniform."

Although the research doesn't make the case for a casual relationship, it is possible that managed accounts lead to increased saving and contributions.

"Getting that communication and extra support could be what helps tip the edge to save a bit more," Look said in an interview.

Similarly, having an advisor might make people more likely to save, he added.

"We do think there's some pretty strong empirical evidence that helps support: There's a positive relationship between managed account use and contribution rates, how much you're saving — but we're not claiming this is causal," Look said. "There's multiple reasons that can go into this … how engaged someone is, how they respond to things. Sometimes people are very motivated and might seek it out, which could be part of our results."

Savers aged 40 to 44 with managed accounts contributed at a rate of 9.1% compared to those without managed accounts, who contributed at a 7.2% rate. Those aged 50 to 54 with managed accounts contributed at a 10.6% rate, compared with a rate of 8.3% for those without managed accounts.

READ MORE: Can managed accounts outperform their own fees?

Bringing down barriers to retirement saving

Morningstar's research may have tax implications for retirement savings and preparation.

"The more that we can encourage people to feel comfortable contributing to their plans, the more tax savings they're going to recognize," said Daniele Griffith, director of tax operations at New York City-based tax planning platform April Tax Solutions. "So, helping them understand the connection between making those contributions to the 401(k) and the benefits of that tax savings for them, I think, is also a big part of that picture."

Investors can be "hesitant to talk to a financial planner because they're afraid that they're going to get sold something or they're going to get sold something that they don't understand," Griffith said. Speaking with advisors whom the employer makes available, either directly or through seminars or another method, can build savings confidence. 

"That's a support for you and not intended to sell you something," she said. "I think it's going to bring down some of those barriers, too."

READ MORE: The pros and cons of rolling over a client's 401(k)

Though Morningstar's study focused on employer-sponsored retirement plans, the results also offer lessons for advisors working with participants.

"The Morningstar research reinforces the role financial advisors can play in helping participants make informed savings decisions, from how much they're contributing to whether they're taking full advantage of their employer match," Ellicott City, Maryland- based Alicia Kong of Voya Financial Advisors said in an emailed statement. Voya Financial Advisors is part of the retirement, investment management and employee benefit company Voya Financial.