Fiduciary Concerns When Considering Managed Accounts

Managed accounts are best known for their superior customization and personalization, making them an attractive option for those searching to cater their retirement portfolios based on personal circumstances. Yet, while much focus is placed on its heightened fees in comparison to other investment products, plan sponsors should note one other concern: fiduciary considerations.

In terms with both plan and participant fees, sponsors must ensure reasonable costs relative to services rendered, according to an article by Cammack Retirement. If not, employers may risk throwing themselves into a fiduciary debacle.

Todd Lacey, chief business development officer at Stadion Money Management, explains how rapid fees associated with managed accounts can climb.

“Sometimes it comes from how they’re built. So, managed accounts that use the funds in the plan, if you take the funds in the plan and then you add an additional management fee on top of those, in order to manage the account portfolio, that can add up pretty quickly,” he says.

To combat these added fees, Mike Volo, senior partner at Cammack, suggests offering the managed account on a voluntary basis, rather than a qualified default investment alternative (QDIA) or another default option. Whereas a QDIA will automatically enroll a participant into the managed account, holding a managed account as a voluntary selection results in reduced fees for both the plan and the participant. Instead of defaulting participants into a managed account, sponsors can apply target-date funds (TDFs)—an investment alternative with lower prices but decreased personalization—as the QDIA. Then, should a participant choose to enroll in a managed account, the TDF can be reassigned.  

“An emerging solution is to default participants into a target-date fund and then based upon a trigger, either account balance or age, then that TDF is then transferred to a managed account, which will increase utilization,” he says.

As an alternative solution, Stadion Money Management offers Storyline, an investment feature focused on small plans and amplified personalization—including personal risk profiles, expectations, and goals—that applies collective investment trusts (CITs) and exchange-traded funds (ETFs) to drive prices down.

Next: The right recordkeeper with quality investment options

Also a fiduciary concern, plan sponsors should be wary of selecting a provider with only one investment option for participants. Otherwise, both Lacey and Volo note, employers may come under fire for failing to create an appropriate portfolio model for participants.

“It’s important that plan sponsors need to really understand what the participant experience is going to be, and understand what communications and how the participants are going to act with the managed account provider,” Volo says.

Adding fuel to the fire, recordkeepers may not offer a slew of managed account options, unlike normally provided in TDFs. However, this depends on the plan provider, according to Lacey.

“Depending on who’s recordkeeping your plan, there may be no managed account option available, to five or more managed account options available,” he says. “So, in some cases the plan sponsors and advisers may not have a lot of choice.”

Yet, that doesn’t mean that managed accounts won’t see more options in the future. Lacey points out how in the past, only limited target-date fund options were available when first introduced. Today, recordkeepers regularly offer multiple funds.

“So a plan sponsor, if they were with a certain recordkeeper, they would have only one target date,” he says. “And now, that’s fairly rare. Regardless of recordkeeper, plan sponsors generally have a number of TDFs to choose from. That’s probably the direction the managed account industry may move as this kind of segment matures.”

Either way, after plan sponsors understand the number of investment funds recordkeepers will provide, Lacey suggests this is the right moment for employers to explore logistics, including underlying investments, costs and more.

“They’d want to look under the hood to see what are the underlying investments used—are they the plan funds or are there other investments? What’s the cost, and what’s the participant experience associated with that managed account. And then finally, should they offer it as a choice, as an opt-in option for participants, or do they want to make it their default fund and actually default people into the managed account,” he says.

According to the Cammack report, plan sponsors will also need to measure if there are enough active and passive funds in the current investment lineup. Otherwise, as the report reads, “an investment lineup would require an overhaul before the addition of managed accounts can be considered.”

Next: Unclear benchmarking in managed accounts  

Due to the increased customization found in managed accounts, ranging from age, marital status and more, performance reporting and benchmarking are noted as cons against the investment product. According to the Cammack report, whereas TDFs and mutual funds can apply a standard benchmark, managed accounts are heavily personalized, making comparison purposes tougher for each participant.

While a fiduciary concern for plan sponsors, employers can find other measures to show proper due diligence, says Volo. Requests for proposals (RFPs), questionnaires concerning fees, investment methodology, and participation communications regarding accounts and levels of engagement can gather insight to ultimately reach expectations and goals.

“Understanding how managed accounts are being developed, how the information is being used, and how they’re using different variables like risk, family information, outside assets, etc.,” Volo says. “Oftentimes I find the managed account providers have a significant amount of data, based on their experience in managing accounts that is helpful in doing the due diligence for a plan sponsor.”

Next: Importance in educating participants

Along with all other retirement and investment features, strategies, and tools, participant education in managed accounts remains integral, and although the idea of managed accounts clicks to advisers and recordkeepers, for participants, that’s not the case.

“The bright side has been greater transparency and more information to plan participants, but the downside has been that’s more information for participants to digest, and they’re overwhelmed,” says Volo.

To avoid stressing participants with a staggering amount of information, Lacey recommends two solutions: integrating technology and one-on-one help; and keeping it clear.

“You have to keep it very simple, the managed account provider has to work very closely with the advisers and the plan sponsors, and they have to blend technology and human support to really try to get people where they’re comfortable and enrolled in the managed account,” he says.  

If plan sponsors do add a managed account as a QDIA or as another default option and find participants are not willing to add information regarding risk tolerance or personal situations, Volo proposes choosing a TDF instead to avoid paying added fees—which could then result in a fiduciary concern.

“If they’re not willing to spend a little time and provide some personal information regarding their risk tolerance and personal situation, they may be better off in a target-date fund,” he says. Because otherwise, the managed account is defaulting based upon a retirement date, but they’re paying an additional fee for that.

However, Lacey warns of possible volatility when turning to TDFs, since the personalized information can be too broad.

“One of the challenges with some of the TDFs is that based on someone’s age, it puts them into a portfolio that might be too volatile for them, and therefore they’re tendencies to sort of bail out when their account goes down, based on market volatility, is high,” he says.

Ultimately, the deciding factor concerning managed accounts depends on what a participant feels better secured with, and what provides the best outcomes.

Lacey says, “so much of managed accounts is getting investors to a portfolio that they’re comfortable with, that makes sense for them, that’s going to have a level of volatility that they’re comfortable with—based on their risk profile.”