Archives for January 27, 2016

Vanguard Managed Account Program (VMAP) Review – Cost vs. Benefits

savebuttonbankVanguard is the one of the biggest providers of defined contribution (DC) plans like 401(k) and 403(b) plans, with more than 3.9 million participants. An optional service they provide for these DC plans is managed account advice, where you pay them an asset-based fee and you cede all portfolio control to them. Vanguard Managed Account Program (VMAP) serves as a fiduciary that sets asset allocations, chooses investments, and monitors/rebalances portfolios on a continuing basis. Fees typically begin at 0.40% on the first $100,000 in assets under management.

Vanguard published a research paper on the before-and-after results from actual participants called The value of managed account advice ].

Even if you aren’t considering paying for such a service, I figured there would be some worthwhile takeaways from their results. Here are my condensed notes from reading their paper.

Reallocation of company stock. About 12% of participants initially had a concentrated position of 20% or more in employer stock. Holding too much stock in your employer is generally understood to be too risky, so VMAP fixes that. The average allocation to company stock fell from 46% to 4% as a result of managed account advice. This group was probably impacted the most by professional advice.

Personalized advice. Not only do you simply indicate an expected retirement age and desired level of risk, but you can add outside assets to the overall asset allocation evaluation. 35% of all VMAP participants personalized the service in some manner.

Forcing you to make savings rate decision. When you sit down and start this service, you have to talk about your goals and see some projected numbers. Then you must make a decision as to your savings rate. Overall, people saved more once faced with this situation. Specifically, 1/3rd of participants increased their savings rates, 7% decreased them, and the remaining majority maintained contribution rates at the same level. See chart below:

vmap_savings

More appropriate asset allocation. In terms of asset allocation, VMAP made things more appropriate and efficient in relation to the need and ability to take risk. Some people got more equity exposure, some people got less. On average, people were told to hold less employer stock, less cash, and more international stocks. See chart below:

vmap_aa

Net effect on retirement wealth. Let see. On average, VMAP participants saved more money. On average, expected returns on VMAP-advised portfolio rose. On average, expense ratios on VMAP-advised portfolio were reduced by 0.06%. But everyone also paid advisory fees. What happens when you take all the factors together? In their own words:

To summarize the interplay of these effects, we used the change in participants’ projected ten-year real retirement wealth as a benchmark for evaluating advice. This allowed us to observe the true effect of managed accounts, independent of the participant’s starting account balance or asset allocation.

On average, managed account participants experienced a relative increase of 15% in projected retirement wealth over 10 years. I’m a little disappointed in “projected” wealth increase vs. actual wealth increase, but I think that’s the best they could do with their limited data set. In order to better see how this works, they broke things into ten equal groups, or deciles, based on the change in retirement wealth. This chart includes the 88% of participants that didn’t have a huge chunk of company stock to start with.

vmap_deciles

As you can see, the bottom decile is mostly affected by the fact that they simply chose to save less money (lower annual contribution rate) and they lowered their stock exposure (lower expected real return). I can only guess that these folks needed to lower their risk levels to a more appropriate level. The top decile both chose to save more money and increased their stock exposure.

Summary. Each of the factors listed above could all be converted to standard advice, i.e. “Things an Investor Should Do”. You should make sure not to hold too much company stock. You should assess your situation, and increase your savings rate if needed. You should make sure your asset allocation is appropriate for your age and risk requirements. Yes, a DIY investor could certainly do these things for themselves. But have you? Will you?

This part is purely my opinion, but how about a general rule, if you haven’t done these things in the last 3 years, perhaps paying for advice may just be worth it? For example, if you’re holding more than 30% of your portfolio in company stock, and haven’t gotten rid of it in the last 3 years, maybe you need someone to do it for you.

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