It’s Time We Stopped Evaluating Managed Accounts From 2006

I purchased an automobile in 2006 that came with the then popular upgrade of an in-dash GPS navigation, and I likely paid more than $2,000 for the privilege. It wasn’t personalized. It offered limited paths from origin to destination. It didn’t help me avoid traffic or poor road conditions or where to find the best price on fuel. Its map database was updated only annually and at an additional fee. Today, we hold GPS navigation in our hands on nearly every mobile device. It costs little and is vastly more personalized.

In 2006, managed account programs in retirement plans were also becoming popular. They, too, were limited in their capacity to serve. Fees were high relative to other options. Personalization was superficial at best given limited demographic and census data access. Performance relative to traditional offerings was only beginning to be tested.

Just as GPS technology has evolved dramatically over the years, so have the technologies that enable the latest generation of adviser managed account offerings. A recent article in the Wall Street Journal, “There’s a New Option in Your 401(k). Read This Before You Try It,” paints multi-asset portfolio solutions with an old brush. It’s true there are still legacy arrangements in place in the 401(k) market that are likely overpriced and underperforming. Superseding them with more modern, flexible, highly-personalized, highly cost-efficient structures has been the driving focus of leading financial technology and investment technology firms in our space for several years.

The result of this effort is a new class of adviser managed accounts that speaks directly to the shortcomings of the past and seeks to fulfill its promise – at scale. It’s time we stopped evaluating these programs based on the 2006 model and, instead, look at the reality of the market’s true potential today.

Managed account programs offer an opportunity to dramatically improve how we democratize investment advice and personalized retirement planning. And study after study reports that a significant majority of retirement plan participants want help with investment advice and financial planning. More importantly, studies such as Transamerica’s 2023 “Managed Accounts in Retirement Plans,” show that managed accounts are improving savings rates and overall return and asset growth outcomes for plan participants, key indicators of plan success.

To meet the needs of today’s participants, managed account programs need to do two critically important things:

1. Improve asset allocation at the participant level to help more people reach their unique retirement income goals.
2. Generate better outcomes net of their costs as compared to single factor target-date funds.

Target-Date Funds and Autopilot

WSJ reporter Anne Tergesen writes in the managed accounts article that TDFs “attract more than 60% of the money that flows into 401(k) plans and have helped put retirement saving for millions on autopilot.” The problem is your “pilot” knows nothing about you other than your age and is flying towards a destination that may or may not be yours. This has always been a design shortcoming of single factor advice products.

The truth about fees

Tergeson references consulting firm NEPC saying “the cost of a managed account ranges from about 0.25% to 0.45% of your balance each year, on top of regular fund fees all investors pay.” The disruptive reality check is that the latest managed account technologies are available for less than 0.10%. And they are not merely less expensive versions of older tech. They deliver significantly more robust risk and allocation strategies that are paired with goal-based personalization previously unattainable. The total all-in cost is comparable to that of an actively managed TDF.

Is there enough data to establish meaningful personalization?

Salary, age, balance and contribution rate are requisite, but certainly not enough data upon which to project individualized retirement income. A meaningful projection also requires information on gender (mortality), residence (taxation), Social Security estimates, and many more factors. The latest recordkeeper / AMA technology integrations consider these factors and more – even before participants are encouraged to add information about spousal or other outside assets. The proof of the approach to personalization is easily conveyed in a suitability scatter plot of a plan’s population that compares the dispersion of personalized equity allocations to the singular glidepath of a traditional target date fund.

Do managed accounts primarily benefit older savers?

A bespoke, data-rich, participant-managed account experience can potentially serve investors at all points on the savings timeline. Naturally, those nearest to retirement will have essential questions about retirement income and may need more help, but all savers benefit from an investment strategy attuned to their individual circumstances, risk posture, timeline, and goals.

Clearly, we need to better communicate and educate advisers, plan sponsors, investment fiduciaries, and the press on the methodologies, user experience, and investment case for managed accounts. Millions of people are counting on this industry to help them succeed. Let’s leave legacy ideas in the past and embrace the technology and value we can deliver today.

Steve McCoy is the CEO of iJoin.