Last week, we focused on target-date funds, specifically their composition and glidepaths. But that survey spurred a number of reader questions—about managed accounts, and how they “fit.” This week readers provided some answers…
As a starting point, a recent report by Cerulli Associates notes that, as of the fourth quarter of 2020, the top nine DC managed account providers comprised more than $400 billon in DC assets and the vast majority of DC recordkeepers now partner with at least one managed account provider. Moreover, more than 4 in 10 plans with at least $250 million in assets offer a managed account (28% do overall, according to the report), and 17% of plan sponsors overall plan to offer a managed account in the next 12 months.
But we started this week by asking readers if they used target-date funds, managed accounts, or both—in their practice. And, as it turned out:
78% - Use both.
18% - Just target-date funds.
4% - Just managed accounts.
Readers shared some perspectives on those decisions. “When you have plan fiduciaries literally being sued over a couple of basis points in ‘excessive fees’ managed accounts remain at an expense level in many situations where it can be difficult to justify them from a fiduciary perspective,” explained one reader. “Managed accounts are expensive, tough to benchmark, haven’t shown they can outperform, are confusing to participants, are impossible to personalize & have questionable revenue streams for RK platforms,” commented another.
Another observed, “It’s offered through the recordkeeper for nearly all of our plans, but there is low adoption.”
“Target date has nearly 100% market share, managed accounts are an optional supplement offered by about a third of our clients,” noted another.
“We find that younger participants are fine with target date funds and passive management. Older participants who have experience more pull backs in the market like the idea of managed accounts,” commented another.
“So many pre-retirees I talk to are overweight equities and have forgotten risk and basic principles due to the long bull run and the quick snap back in 2020,” cautioned one reader. “Too many RK require their proprietary managed account,” complained another.
Default Lines?
Next, we asked if any of their clients defaulted participants into managed accounts. The results were varied:
40% - No.
18% - Yes, some of them.
17% - Yes, a few of them.
12% - Not yet, but it’s under consideration.
7% - Yes, one of them.
6% - Yes, most of them.
And with the variety of responses came some additional observations, both positive and not-so-positive:
I am vehemently opposed to defaulting people into a ‘customized’ solution that comes at additional cost... and further, it seems inconsistent to default people—those who take no action and are ruled by inertia—into something that is arguably most effective when used by those that are fully engaged.
Just no appetite from plan sponsors.
Most of the handful of plans we have that default into managed accounts are on a hybrid QDIA, where only folks over a certain age (i.e. 55) default to managed accounts, younger folks default to TDFs.
Managed accounts do a much better job of impacting / increasing contribution rates.
It depends on the company and demographic.
The one defaulting into managed accounts uses a zero fee product.
Most plan sponsors are concerned about using it as the default since the expenses are traditionally higher in the managed account versus the low-cost Vanguard target date funds.
The best way to implement Advisor Managed Accounts is in a dynamic QDIA structure, defaulting participants into the AMA solution at a certain trigger or transition stage.
The PS’s aren’t comfortable defaulting into risk levels—even though that basically what TDFs do. They don’t really get it either.
The cost of managed funds vs cost of target date funds make the managed fund default a BAD fiduciary decision, I think ...
Information, Pleas?
And then we asked if participants were defaulted into managed accounts, what information was gathered in order to do so (more than one option was allowed):
52% - Age/retirement date.
31% - Gender.
24% - Risk tolerance (this generally via some kind of followup, or assumption).
24% - Other assets.
2% - Race.
In the “other” category, geography/location/state showed up a lot, as did income. Marital status was also noted.
“We feel it is more appropriate to default to TDFs and then to have the conversation through education about our model portfolios,” commented one reader. Another noted that it was “confusing, impossible to engage participants to get necessary data.”
“This is why defaulting someone in is difficult,” noted another, “because there is only limited information they can gather through the census, without the participant providing a full snapshot.”
“As participants get older and further along in their career, it’s more important to protect them from making bad decisions and important to provide them access to professional advice and money management. It makes most sense to use a certain age (most of the time 45, 50, 55) to default participants into a more custom solution,” noted another.
Replacement ‘Rate’
With all that taken into account, we asked readers if they thought managed accounts would replace target-date funds.
45% - Not likely.
17% - Yes, for some accounts.
15% - Not in any significant numbers.
14% - Yes, eventually.
7% - Not sure.
1% - Yes, but mostly among larger clients.
1% - Yes, but mostly for participants with larger balances.
Some additional comments on the “con” side:
Unless fees are lowered, or it can be proven that managed accounts significantly increase retirement wealth net of fees, they will remain a tough sell for many plan sponsors.
Given TDF litigation, it’s a matter of time until a law firm also attacks TDF use based on poor performing mandates within the TDF (e.g. ABC target date using bottom performing ABC Growth Fund within the TDF glide path allocation). I think this will lead to significant outflows in TDF and greater use of managed solutions and other asset allocation solutions that allow for open architecture of the underlying assets.
Not enough transparency to prove their worth.
Expensive, confusing, no track record, no benchmark, firms don’t have history running these, no success versus off the shelf TDF, questionable revenue streams to RK platforms.
People are largely apathetic so most will continue in the target date if that is the default, especially if they continue to see decent returns. They aren’t likely to do any research on their own.
Fees will continue to be an issue for Managed Accounts, especially in the small plan market. The additional 0.50% to 0.65% in fees for the typical service runs counter to the last decade of effort to reduce fees for plan participants. The discussion/debate about outcomes/returns of MAs vs TDFs is a valid one, but the issue of controlling expenses and paying no more than “reasonable” fees will be a headwind for Managed Accounts.
Managed accounts vs Target date funds is a money grab by plan providers ... most participants who are defaulted into a choice are new and have small balances ... once the balance grows a bit they start paying attention. furthermore, the plan advisor should be paying attention as well ...
As for those who thought it was an idea whose time would come:
Continued pressure on MA pricing will result in the delta between TDFs and MAs not being significant enough to offer TDFs.
For older participants I could see managed accounts taking over, and phase 2.0 might even be lifetime income solutions.
I hope so.
We are big proponents of TDFs, they are efficient vehicles and achieve the needs for most individuals in the plans. However, over time technology and data will continue to improve and become more available, success metrics will continue to gain more steam, and employees will eventually always want a custom solution instead of an in the box solution. This will take some time though (10-15) years.
It is obviously in an evolutionary process right now but the advantages are crystal clear. If you can build managed accounts utilizing CIT structures or even have a very low average expense ratio in your current plan investment lineup and the managed account draws from the selections you are already performing due diligence upon I believe it’s a win-win.
Under Standings?
And finally, we asked readers what they wished plan sponsors/participants understood (more) about managed accounts:
I wish participants would ENGAGE more with the managed accounts. When they are defaulted they often do not add their own personal data to improve the ability for managed accounts to be more tailored.
Their performance.
That they allow for best of best investment instead of all assets in one fund company basket. And that technology allows for a personal experience for the participant—leads to greater savings rates and better performance due to appropriate allocation.
That they might be getting “sold” to them because someone is making more money in doing so.
Their value.
They need to provide more information about their goals and resources.
Asset allocation models can give the same result at a 95% lower cost.
Many see them as an asset grab on which more fees can be charged.
Who makes what on the underlying revenue streams & what is suspect/questionable on deal making behind the scenes.
Most of the managed accounts do more than just pick the mix of funds. Most don’t understand the full value of what they get for the fee being charged.
The behavioral aspects—what people contribute, what they do when they leave the company / retire. MAs do a much better job than TDFs here.
Often times the most valuable piece of managed accounts isn’t just the asset allocation, but the advice component that goes along with accumulation and decumulation.
That it is not complicated to implement or administer. It is not expensive using the effective underlying assets. It’s simply the inertia of getting participants to understand how they work. Education is tricky but enrollment/online wizards guiding participants through the process seems to work.
They are often a waste of money and are oversold by many providers.
That they are a far better option that TDFs . . . less proprietary funds, provide a more diversified portfolio, an opportunity to offer each participant a better fit.
The benefits from the participant point of view, and the increased fiduciary protection from the plan sponsor point of view.
They need to share outside information to be effective.
There isn’t a conflict if the program is built the right way. Advisors can be a fiduciary and providing services to the plan, as well as a fiduciary and providing services to each participant within the plan.
Their value.
How they balance your risk level with great diversification.
Can provide better diversification and more customization other than a one size fits all to just a target date in the future.
How important it is to stay engaged and not be afraid to diagnose the full financial picture. It’s like not wanting to go to the doctor because you don’t want to be told or find out there’s something wrong. What you don’t know, you can’t fix and the sooner you diagnose, the better the outcome.
They have additional cost.
Providing additional data points really does allow for a more customized allocation. Management does have a cost.
Packaged solutions vs. custom solutions. Downside risk management.
The added cost to the robo-advising product and the different asset allocation to Target Date Funds.
From a plan sponsor viewpoint, managed accounts should be offered in plans with self-directed investments. Participants should not be defaulted into them. Instead, plan sponsors need to periodically educate their participants on what managed accounts offer to participants and their cost.
Plan Sponsors should demand data specific to their plan participants detailing the quantitative results that managed accounts are or are NOT delivering to participants paying for the service. Plan Sponsors should also be aware of and consider the long term consequences of accepting lower record keeping costs as a results of adding managed accounts.
Other Comments
I think that managed accounts have always had a tremendous potential; it just hasn’t been realized.
Advisors need to be careful with looking at managed solutions as way for them to derive additional revenue. They are simply blessing the robo allocation that is used, not really providing significant advice. That fee is going to come into scrutiny as the assets in the solutions grow over time, so advisors need to get ready to prove their value!
Although intellectually, I understand that managed accounts can work, I don’t think they necessarily work well within an ERISA plan for quite a few reasons—mostly transparency and inability to benchmark results (risk adjusted returns). That said, we do offer them with many caveats and track data as to usage as much as possible. What we’ve seen is little to no usage in them. What we are also NOT seeing, is usage by the larger account balance holders.
Some record keepers put the managed account right up front in enrollment materials and websites and hide the lower cost model option in their website since they generate less revenue.
There are hundreds of various types of TDFs out there. more than enough to help any plan & their participants. other products seem to be self serving for revenue to firms. we are here to help people...not ourselves.
Managed accounts work best for older employees who have significant savings ($100K+), where the range of strategies can vary much more. Younger folks or those who haven’t saved much are better suited in a TDF.
If Target dates begin to move toward indexed structures, such as the Blackrock offering, then Managed account use may increase in response to participant concern that “no one is managing” their money is the passive strategy. It could be comforting to some.
I believe one of the biggest hurdle to managed accounts is the expense factor. Let’s say for example the plan has a 0.20% recordkeeping fee, 0.25% advisory fee, the managed account provider charges 0.50%, and the underlying fund expenses are 0.30%, the employee is paying 1.25% all in. Unless they are genuinely getting value out of the managed account service, aside from just pure asset allocation, it doesn’t seem to make a lot of sense given the high hurdle rate. Additionally, the managed account product seems to be most useful for older participants who can benefit from said advice particularly as it relates to decumulation. I do see lifetime income becoming a piece or whole part of this equation at some point though.
Decades ago I sat on a panel discussing managed accounts at a major conference. A plan sponsor on the panel from a very large tech company was asked what a fair/appropriate fee for a managed account should be, given services and how automated the product was. His answer was one to two basis points. I think he was generally right over the very long run, and over time, fee compression will reduce managed account fees to below ten basis points. Fees are still far too high in the space currently.
We manage our own accounts—have for 10 years in our 401k plans. Their performance is strong. And . . . we charge no extra fees to do so . . . it is all part of the total plan management we offer. In some of our plans, 100% of all participants have chosen our managed accounts.
We encourage all of our plan sponsors to consider offering managed accounts on their plans since it is no additional expense to the plan sponsor and is a great alternative for the participants. We have over 85% of our plan sponsors who have managed accounts in their plan and a 55% participant adoption rate.
Concerned about the role the Recordkeeper plays financially in the selection of the managed accounts.
Performance numbers are not easy to track given the number of variations.
All of our advisors are using and selling our AMA solutions. We are live with our white labeled solution (Personalized Portfolios) on 10 RKs today, with more coming onboard soon.
The management fee associated with managed accounts I hope will face pressure as some providers are wildly expensive, some on a slide scale based on account balance, others a flat fee to all. In addition, hope to see options at each provider, versus the circa 2000 proprietary only TDFs.
Fees need to reasonable, data integration from payroll or HRIS important and simple at participant-level. Holistic and personalized approaches are even more critical for older participants. TDFs have been an effective tool but it is time to migrate to multi-factor solutions.
Like most advances in our industry relevant in large market but scale issues on small-to-mid.
I purchased a practice with many plans (including “micro” plans) with managed accounts as the default, so over the last several years I have become very familiar with how the service impacts participants, plan sponsors, and advisors. I have become very concerned about several aspects of managed accounts including: lack of data to support the value added for plan participants paying for the service, lack of inclusion of participant risk factors by the managed account providers, lack of clarity about managed account expenses, and concerns about how to unwind managed accounts from a recordkeeper. It is clear how managed accounts benefit the recordkeepers, it is decidedly less clear to me how a plan sponsor can justify their inclusion without adequate benchmarking material and plan specific data justifying their considerable expense.
Managed accounts have not been successful due to the higher cost of existing solutions and poor education of sponsor and participants. We are nearing a point where the cost is approaching TDFs (sometimes lower cost) and it begins to make more sense for a greater percentage of participants.
This article originally appeared on NAPA.
