EFE Finds Increased Participant Inputs to Managed Accounts

Edelman Financial Engines says the number of participants adding personal inputs into managed account offerings has doubled over the past ten years in an analysis of more than one million of its members released Wednesday.

The number of participants providing personal data and preferences to guide managed account investments rose from 33% in 2014 to 74% in 2023, according to an EFE analysis.

The firm attributed some of that growth to more customized services in managed accounts, such as adding information from spouses, estimating retirement expenses and adding other income sources such as pensions and IRAs.

“From working with employers and employees for more than two decades, we have learned how to drive personalization with employees through our omni-channel experience and communications,” says EFE’s Kelly O’Donnell, president of employer solutions. “For example, prompts at the right time and place to remind members to take full advantage of the employer 401(k) match have meaningfully changed outcomes.”

While managed accounts have been available for over two decades, uptake has been tempered in part by concerns from plan sponsors and their advisers that participants do not engage enough for the value to meet the additional costs as compared to options such as target date funds. The total in-plan managed account market stands at more than $434 billion, according to Cerulli Associates, with EFE noting it holds about 45% of the market and 1.2 million program members across 700 employers.

“A target-date fund is a product, not a service,” O’Donnell says. “You can bridge the difference in fees between a TDF and managed accounts when you look at the benefits in their entirety. Both solutions will diversify your portfolio. However, a TDF won’t consider your full financial picture and goals.”

Another critical selling point of managed accounts, she says, is access to a licensed financial adviser—especially when dealing with life changes or times of market volatility.

“When markets drop, a TDF is just a portfolio and doesn’t have an adviser to call to help you navigate questions about the markets and potentially keep you from making an emotional mistake,” she says.

In its report, EFE also noted that managed account members are contributing 9.1% of their income to retirement, as compared to 7.8% for non-members, and 7.4% for people investing in a single TDF.

EFE’s managed account fees range up to .60% and vary according to size of the plan, the account balance, and the services being offered. The average TDF fee is about .32%, according to Morningstar.

Personalized Experience

O’Donnell touts the chance for managed accounts to personalize risk tolerance and retirement goals for members both to create investment strategies and make retirement income projections.

“Employees want to know if they are on target or not, and if they need to make any adjustments to their plans,” she says. “Our experience also includes interactive online levers for members to see in real-time how changes in contributions or retirement age might impact projected income goals.”

Bringing in outside accounts is also important, she says, as employees like to see all their financial information in one place, and it allows the provider to “appropriately diversify their 401(k) when we have more holistic information.”

In its report, EFE also noted that older participants closer to retirement are more likely to use managed account services. Forty-seven percent of managed account members are 50 or older as compared to 29% for TDFs, the firm found.

Source: Edelman Financial Engines

“While managed accounts work for employees of all ages, we find that the benefits are greatest as financial complexity increases,” O’Donnell says. “As employees approach retirement, they are facing many critical decisions like how to optimize a retirement income strategy, when to claim Social Security and how to best plan for Medicare expenses.”

O’Donnell says the use of managed accounts by older workers is not yet being driven by the proliferation of hybrid qualified default investment alternatives, which are designed to shift participants from TDFs into a managed account when they get closer to retirement. She called the product a “mostly untapped option that has real potential to improve retirement readiness,” by, for instance, “defaulting a segment of near-retirees who have a poor income replacement ratio into a managed account.” 

AI Assistance

EFE forecasts further personalization of products in part driven by artificial intelligence. O’Donnell notes its potential to make financial planning more accessible and bespoke to savers of all levels, with some implementations happening soon.

“In the near-term, I see AI creating a more interactive experience and putting in front of individuals content that is specific to them,” she says. “You can imagine a message personalized to their situation, like ‘You’re leaving money on the table. You only need to save X dollars a week more to get the full match from your employer.’”

EFE’s report analyzed more than one million managed account users across different ages and career stages amid large employers across industries and among various retirement plan recordkeepers.

The firm has also recently been expanding its wealth management footprint to provide services beyond DC managed accounts. In May, it announced a deal to acquire Soundmark Wealth Management, and in 2023 it announced the acquisition of New England Pension Plan Systems, a wealth and retirement shop overseeing $1.5 billion in assets.