November 6, 2025 • 13 mins
Have you taken full advantage of automating your investments? You can improve your returns, reduce emotional decision-making, and generally end up with better results simply by putting your investing on autopilot.
Jeffrey Ptak is the managing director at Morningstar. Previously, he was the chief ratings officer.
Each week, “At the Money” discusses an important topic in money management. From portfolio construction to taxes and cutting down on fees, join Barry Ritholtz to learn the best ways to put your money to work.
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Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:02):
Bloomberg Audio Studios, podcasts, radio news.
Speaker 2 (00:28):
Have you taken full advantage of automating your investments, You
can improve your returns, reduce emotional decision making, and generally
end up with better results simply by putting your investing
on autopilot. To help us figure out how, let's bring
in Jeffrey Pattak. He's managing director at morning Star. Previously
(00:51):
he was the chief rating officer there. He's been with
morning Star since two thousand and two, and his research
has shown features like auto enrollment or contribution increases, default investments,
and target date funds enable investors to bypass common pitfalls
of market timing and emotional trading. So, Jeffrey, let's define
(01:14):
the automation features you're discussing in your research, things like
steady paycheck deductions and regularly balancing. How can an investor
set that up?
Speaker 3 (01:25):
Sure, so you know, it's relatively straightforward. If you're working
with a brokerage platform to enable those types of features.
In some other context, like a retirement plan, it might
be standard plan features. In fact, you might be defaulted
into them, and so away you go. And so it's
well within our reaches investors either to switch these features
(01:47):
on at our own election or to be opted into
them as we would be in a retirement plan.
Speaker 2 (01:53):
So explain to me the difference between auto enrollment and
auto escalation for sure.
Speaker 3 (02:00):
Yeah, So auto enrollment the notion is your auto enrolled
you become a participant in the retirement plan. Auto escalation
is you're in the plan and then your contribution rate
is steadily increased at a predetermined level. And so you know,
one is about being in participating, the second is about
(02:21):
the extent to which you are participating. Both valuable.
Speaker 2 (02:25):
So your research has found automatic investing reduces bad investor outcomes,
reduces behavioral errors, promotes consistency. Sounds a little too good
to be true. What sort of data have you found
that supports automation leading to improved investor returns?
Speaker 3 (02:44):
Yeah, real good question. So we it's a bit inferential
because we're not a brokerage platform and so we don't
have sort of the tick data. Nevertheless, we can look
at the types of funds and where they tend to
be used and whether automation is common in those settings,
you know, and draw some conclusions. And one of the
more striking findings from our research this is the mind.
The gap study that we conduct is that investors in
(03:06):
allocation funds, the most popular version of which are target
date funds, they do the best job of capturing their
funds total returns. That is, they experience the fewest frictions
related to the timing and magnitude of their transactions over time.
And what do we know about target date funds. We
know that people are commonly defaulted into them, that they
regularly invest in them just as part of their regular
(03:29):
payroll deduction that takes place, and so they're kind of
the signal example of automation. Then take some other examples
of fun types that you wouldn't find in a retirement plan,
Like maybe the quintessential example would be something like a
sector fund or a thematic fund. You're typically not going
to find those in a plan lineup. We found those
that have some of the widest gaps, and why is
(03:51):
that they're not used within that gilded cage of a
retirement plan. Furthermore, they might be more subject to discretionary
ad hoc off site go trading decisions, where there might
be a greater propensity to trade an emotion than would
be the case with something like a target date fund.
Speaker 2 (04:08):
And it sounds like the key advantage of automation is
it tends to reduce unnecessary trading and it also reduces
the emotional responses to just ordinary market volatility.
Speaker 3 (04:21):
It does, yeah, it, you know it. Basically, it's the
best kind of inertia. I would say, we know that,
you know, market bobbles can be unnerving to investors, and
left to their own devices, they might make a change
of their allocation. They could elect to remove capital from
the markets, and we know how harmful that can be
(04:42):
to their long term compounding power. Whereas in these settings,
because they just continue to mechanically add to their investments,
and those investments in turn, you know, take care of
some of the mundane tasks like rebalancing and adjusting the
asset mix, they just get on with it. And I
think that worked to their benefit over the long term,
and certainly our research seems to bear that out.
Speaker 2 (05:04):
So we talked about the investor gap between their actual
performance and their funds performance. When we're looking at automated
target date funds or automated allocation funds, how measurable is
the gap between those and people who kind of self
manage that allocation.
Speaker 3 (05:24):
Yeah, So with allocation funds, the largest subset of which
are target date funds, we found almost no gap. It
was basically point one percentage points per year. Then when
you focus on every other type of fund, we found
that the gap was around one point two percentage points
per year. Now, yes, among those other types of funds,
it is quite possible that some are using them in
(05:45):
an automated fashion. Maybe they have some sort of investment
plan that they've set up, or they've otherwise mechanized the process.
But I think it stands the reason that for a
fairly large subset of that capital, it's being invested in
a more discretionary fashion. You can see the difference between
the two of those. It amounts to around one point
one percentage points annually of return that's being foregone effectively.
Speaker 2 (06:08):
So what are the automation features that have consistently good
benefits for investors?
Speaker 3 (06:15):
So I would say that probably the biggie is auto enrollment.
We don't have as much data that we collect, but
there are others like Vanger puts out a terrific annual
study called How America Saves. In the most recent edition,
they reported a sixty one percent of the plans they
service as clients at auto enrollment, and two thirds of
(06:36):
those plans that offered auto enrollment also offered auto escalation.
And then of those that auto and roll, ninety eight
percent of them are defaulted into a target date and
striking me, the average participant holds only two funds, So
it gives a sense of the reach of automation in
our retirement system. If I had to choose between the
two of those, auto enrollment versus auto escalation, it's a
(07:00):
bit of a false binary, but all the same, I
would say auto enrollment is far far more important. Why
is that. It's because we want people participating so that
they can compound their wealth. Even if they were to
experience a return gap, we would rather that they get some,
if not all, of their fund's returns and auto enrollment
and cease to that.
Speaker 2 (07:19):
Yeah, before the default settings, there were stories were rife
about people working at places for years and the money
just piled up in cash and did nothing. It's kind
of it's kind of crazy. So, but that that leads
to an obvious question. How widespread has the adoption of
animation been in the various retirement ecosystems that are out there.
Speaker 3 (07:40):
It's become very widespread, as you know, as I might
have mentioned before, you're talking about two thirds of plans
that offer auto enrollment and and then also a very
significant number auto escalation as well. And you know, I
think that one other thing from the Vanguard study that
I've mentioned before that I found quite telling. They found
(08:02):
that one percent of target date fund investors transacted last
year that'd be twenty twenty four, compared to eleven percent
of investors and other types of funds. And so it
just gives a sense not only the breadth of automation
that's taking place here, but also some of the benefits
it confers and tamping down transacting that we see within
these plans.
Speaker 2 (08:21):
Any particular demographic groups stand to benefit more or less
from automating these strategies.
Speaker 3 (08:28):
That is a great question. Was it was one of
the most eye opening findings from that study. They found
that auto enrollment disproportionately benefited younger and lower earning participants.
So you were really talking about a quantum among those cohorts,
and I think that's critical because we want to get
(08:49):
those folks into plans. You know, in some senses, you
were talking about socioeconomic demographics that may be more vulnerable
that otherwise wouldn't have the opportunity to compound wealth, and
the way we'd like to see, auto enrollment has helped
to ensure that those gaps get closed. And so I
think that that's a really really telling and encouraging finding
(09:10):
from their study.
Speaker 2 (09:11):
What about non qualified plans, portfolios outside of for one
ks or eras, what can we do to automate those
sort of holdings?
Speaker 3 (09:22):
Yeah, so I think to the extent, so one, I
think that one thing that you can do is you
can set up sort of an auto investment plan, very
similar to the kind of setup that you would find
in a retirement plan. Put that on autopilot, and then
I would say to the extent that you can automate
your investments. I may have mentioned in other settings that
it's important to have a plan first of all, But
(09:44):
then once you've got that plan, you know, maybe it's
an allocation fund, a target day fund, or a target
risk fund where you're fixing the percentage of equity, fixed income,
and other asset classes, and that obviates the need for
you to go in and make adjustments on your own. Automate, automate, automate.
I think those are the key things to ensure that
we capture as much of our funds, total returns, and
(10:04):
compound as we can.
Speaker 2 (10:06):
So there are a lot of new digital investing tools
and AI is starting to have an impact on various strategies.
What do you think is going to have a powerful
impact on both automation and future investor outcomes?
Speaker 3 (10:21):
Yep, And so I think, you know, I'm an avid
user of AI. I know how beneficial it's been in
my own work, making me more productive. I think that
it confer the same sorts of benefits to investors, you know,
maybe helping them to formulate a plan, maybe figuring out
the optimal way for them to allocate their assets, you know,
(10:42):
and otherwise sort of keeping them to you know, sort
of the goals that they've set consistent with their risk parameters.
You know. The other side of it is it can
engender over confidence. You know, maybe we feel like we've
got the capacity to make trading decisions that maybe really
are outside of our circle of competence, and so we
just want to make sure, like so many of these
(11:03):
other tools and resources we have available to us, we
use it in a way that advances our goals and
we don't get carried away in an overconfident way, you know,
sort of an impulse that we're you know, maybe all
you know, likely to succumb to from time to time.
Speaker 2 (11:19):
And for either an individual investor or perhaps a financial advisor,
if they're seeking to automate investments, what are the most
important factors they should be thinking about when they're either
selecting a platform or a tool to use to help automate.
Speaker 3 (11:35):
That's a great question. So, you know, one of the
corollaries to automating, at least in a retirement plan context,
is it is a little bit of an all in
one decision. So typically if the target DAED fund is
going to be offered by a single provider, and so
what that means is that we want to make sure that,
you know, we're feeling very confident about that organization's culture,
(11:59):
about its staying power, about its overall investor centricity. Those
aren't necessarily easy things to tease out, but I think
a little bit of research can tell you whether or
not this is a firm that is a certain kind
of pedigree, a certain kind of reputation. Look at the
fees that at levees. Fees speak volumes about organizational fibers.
Speaker 2 (12:17):
So to speak.
Speaker 3 (12:18):
And I think if you can go through and satisfy
yourself that this is an organization that has my best
interest at heart, that is levying a fair fee, and
is likely to be around for the years to come
over which I'm looking to compound. Those are all good
facts and I think that they portend well for you
to succeed in capturing your fund's return and compound some
real wealth over time.
Speaker 2 (12:38):
So to wrap up, there are lots of automated tools
that you could use, platforms, specific allocation funds, other things
you can do to improve your returns, reduce emotional decision making,
and generally end up with better performance simply by putting
your investments on autopilot. Barry whittlets, you're listening to Bloombergs
(13:02):
at the money.
Speaker 1 (13:05):
This is a desist.
Speaker 2 (13:09):
She said, Oh baby, do it man,
Bloomberg Audio Studios, podcasts, radio news.
Speaker 2 (00:28):
Have you taken full advantage of automating your investments, You
can improve your returns, reduce emotional decision making, and generally
end up with better results simply by putting your investing
on autopilot. To help us figure out how, let's bring
in Jeffrey Pattak. He's managing director at morning Star. Previously
(00:51):
he was the chief rating officer there. He's been with
morning Star since two thousand and two, and his research
has shown features like auto enrollment or contribution increases, default investments,
and target date funds enable investors to bypass common pitfalls
of market timing and emotional trading. So, Jeffrey, let's define
(01:14):
the automation features you're discussing in your research, things like
steady paycheck deductions and regularly balancing. How can an investor
set that up?
Speaker 3 (01:25):
Sure, so you know, it's relatively straightforward. If you're working
with a brokerage platform to enable those types of features.
In some other context, like a retirement plan, it might
be standard plan features. In fact, you might be defaulted
into them, and so away you go. And so it's
well within our reaches investors either to switch these features
(01:47):
on at our own election or to be opted into
them as we would be in a retirement plan.
Speaker 2 (01:53):
So explain to me the difference between auto enrollment and
auto escalation for sure.
Speaker 3 (02:00):
Yeah, So auto enrollment the notion is your auto enrolled
you become a participant in the retirement plan. Auto escalation
is you're in the plan and then your contribution rate
is steadily increased at a predetermined level. And so you know,
one is about being in participating, the second is about
(02:21):
the extent to which you are participating. Both valuable.
Speaker 2 (02:25):
So your research has found automatic investing reduces bad investor outcomes,
reduces behavioral errors, promotes consistency. Sounds a little too good
to be true. What sort of data have you found
that supports automation leading to improved investor returns?
Speaker 3 (02:44):
Yeah, real good question. So we it's a bit inferential
because we're not a brokerage platform and so we don't
have sort of the tick data. Nevertheless, we can look
at the types of funds and where they tend to
be used and whether automation is common in those settings,
you know, and draw some conclusions. And one of the
more striking findings from our research this is the mind.
The gap study that we conduct is that investors in
(03:06):
allocation funds, the most popular version of which are target
date funds, they do the best job of capturing their
funds total returns. That is, they experience the fewest frictions
related to the timing and magnitude of their transactions over time.
And what do we know about target date funds. We
know that people are commonly defaulted into them, that they
regularly invest in them just as part of their regular
(03:29):
payroll deduction that takes place, and so they're kind of
the signal example of automation. Then take some other examples
of fun types that you wouldn't find in a retirement plan,
Like maybe the quintessential example would be something like a
sector fund or a thematic fund. You're typically not going
to find those in a plan lineup. We found those
that have some of the widest gaps, and why is
(03:51):
that they're not used within that gilded cage of a
retirement plan. Furthermore, they might be more subject to discretionary
ad hoc off site go trading decisions, where there might
be a greater propensity to trade an emotion than would
be the case with something like a target date fund.
Speaker 2 (04:08):
And it sounds like the key advantage of automation is
it tends to reduce unnecessary trading and it also reduces
the emotional responses to just ordinary market volatility.
Speaker 3 (04:21):
It does, yeah, it, you know it. Basically, it's the
best kind of inertia. I would say, we know that,
you know, market bobbles can be unnerving to investors, and
left to their own devices, they might make a change
of their allocation. They could elect to remove capital from
the markets, and we know how harmful that can be
(04:42):
to their long term compounding power. Whereas in these settings,
because they just continue to mechanically add to their investments,
and those investments in turn, you know, take care of
some of the mundane tasks like rebalancing and adjusting the
asset mix, they just get on with it. And I
think that worked to their benefit over the long term,
and certainly our research seems to bear that out.
Speaker 2 (05:04):
So we talked about the investor gap between their actual
performance and their funds performance. When we're looking at automated
target date funds or automated allocation funds, how measurable is
the gap between those and people who kind of self
manage that allocation.
Speaker 3 (05:24):
Yeah, So with allocation funds, the largest subset of which
are target date funds, we found almost no gap. It
was basically point one percentage points per year. Then when
you focus on every other type of fund, we found
that the gap was around one point two percentage points
per year. Now, yes, among those other types of funds,
it is quite possible that some are using them in
(05:45):
an automated fashion. Maybe they have some sort of investment
plan that they've set up, or they've otherwise mechanized the process.
But I think it stands the reason that for a
fairly large subset of that capital, it's being invested in
a more discretionary fashion. You can see the difference between
the two of those. It amounts to around one point
one percentage points annually of return that's being foregone effectively.
Speaker 2 (06:08):
So what are the automation features that have consistently good
benefits for investors?
Speaker 3 (06:15):
So I would say that probably the biggie is auto enrollment.
We don't have as much data that we collect, but
there are others like Vanger puts out a terrific annual
study called How America Saves. In the most recent edition,
they reported a sixty one percent of the plans they
service as clients at auto enrollment, and two thirds of
(06:36):
those plans that offered auto enrollment also offered auto escalation.
And then of those that auto and roll, ninety eight
percent of them are defaulted into a target date and
striking me, the average participant holds only two funds, So
it gives a sense of the reach of automation in
our retirement system. If I had to choose between the
two of those, auto enrollment versus auto escalation, it's a
(07:00):
bit of a false binary, but all the same, I
would say auto enrollment is far far more important. Why
is that. It's because we want people participating so that
they can compound their wealth. Even if they were to
experience a return gap, we would rather that they get some,
if not all, of their fund's returns and auto enrollment
and cease to that.
Speaker 2 (07:19):
Yeah, before the default settings, there were stories were rife
about people working at places for years and the money
just piled up in cash and did nothing. It's kind
of it's kind of crazy. So, but that that leads
to an obvious question. How widespread has the adoption of
animation been in the various retirement ecosystems that are out there.
Speaker 3 (07:40):
It's become very widespread, as you know, as I might
have mentioned before, you're talking about two thirds of plans
that offer auto enrollment and and then also a very
significant number auto escalation as well. And you know, I
think that one other thing from the Vanguard study that
I've mentioned before that I found quite telling. They found
(08:02):
that one percent of target date fund investors transacted last
year that'd be twenty twenty four, compared to eleven percent
of investors and other types of funds. And so it
just gives a sense not only the breadth of automation
that's taking place here, but also some of the benefits
it confers and tamping down transacting that we see within
these plans.
Speaker 2 (08:21):
Any particular demographic groups stand to benefit more or less
from automating these strategies.
Speaker 3 (08:28):
That is a great question. Was it was one of
the most eye opening findings from that study. They found
that auto enrollment disproportionately benefited younger and lower earning participants.
So you were really talking about a quantum among those cohorts,
and I think that's critical because we want to get
(08:49):
those folks into plans. You know, in some senses, you
were talking about socioeconomic demographics that may be more vulnerable
that otherwise wouldn't have the opportunity to compound wealth, and
the way we'd like to see, auto enrollment has helped
to ensure that those gaps get closed. And so I
think that that's a really really telling and encouraging finding
(09:10):
from their study.
Speaker 2 (09:11):
What about non qualified plans, portfolios outside of for one
ks or eras, what can we do to automate those
sort of holdings?
Speaker 3 (09:22):
Yeah, so I think to the extent, so one, I
think that one thing that you can do is you
can set up sort of an auto investment plan, very
similar to the kind of setup that you would find
in a retirement plan. Put that on autopilot, and then
I would say to the extent that you can automate
your investments. I may have mentioned in other settings that
it's important to have a plan first of all, But
(09:44):
then once you've got that plan, you know, maybe it's
an allocation fund, a target day fund, or a target
risk fund where you're fixing the percentage of equity, fixed income,
and other asset classes, and that obviates the need for
you to go in and make adjustments on your own. Automate, automate, automate.
I think those are the key things to ensure that
we capture as much of our funds, total returns, and
(10:04):
compound as we can.
Speaker 2 (10:06):
So there are a lot of new digital investing tools
and AI is starting to have an impact on various strategies.
What do you think is going to have a powerful
impact on both automation and future investor outcomes?
Speaker 3 (10:21):
Yep, And so I think, you know, I'm an avid
user of AI. I know how beneficial it's been in
my own work, making me more productive. I think that
it confer the same sorts of benefits to investors, you know,
maybe helping them to formulate a plan, maybe figuring out
the optimal way for them to allocate their assets, you know,
(10:42):
and otherwise sort of keeping them to you know, sort
of the goals that they've set consistent with their risk parameters.
You know. The other side of it is it can
engender over confidence. You know, maybe we feel like we've
got the capacity to make trading decisions that maybe really
are outside of our circle of competence, and so we
just want to make sure, like so many of these
(11:03):
other tools and resources we have available to us, we
use it in a way that advances our goals and
we don't get carried away in an overconfident way, you know,
sort of an impulse that we're you know, maybe all
you know, likely to succumb to from time to time.
Speaker 2 (11:19):
And for either an individual investor or perhaps a financial advisor,
if they're seeking to automate investments, what are the most
important factors they should be thinking about when they're either
selecting a platform or a tool to use to help automate.
Speaker 3 (11:35):
That's a great question. So, you know, one of the
corollaries to automating, at least in a retirement plan context,
is it is a little bit of an all in
one decision. So typically if the target DAED fund is
going to be offered by a single provider, and so
what that means is that we want to make sure that,
you know, we're feeling very confident about that organization's culture,
(11:59):
about its staying power, about its overall investor centricity. Those
aren't necessarily easy things to tease out, but I think
a little bit of research can tell you whether or
not this is a firm that is a certain kind
of pedigree, a certain kind of reputation. Look at the
fees that at levees. Fees speak volumes about organizational fibers.
Speaker 2 (12:17):
So to speak.
Speaker 3 (12:18):
And I think if you can go through and satisfy
yourself that this is an organization that has my best
interest at heart, that is levying a fair fee, and
is likely to be around for the years to come
over which I'm looking to compound. Those are all good
facts and I think that they portend well for you
to succeed in capturing your fund's return and compound some
real wealth over time.
Speaker 2 (12:38):
So to wrap up, there are lots of automated tools
that you could use, platforms, specific allocation funds, other things
you can do to improve your returns, reduce emotional decision making,
and generally end up with better performance simply by putting
your investments on autopilot. Barry whittlets, you're listening to Bloombergs
(13:02):
at the money.
Speaker 1 (13:05):
This is a desist.
Speaker 2 (13:09):
She said, Oh baby, do it man,
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