Products February 1, 2024

Managed Accounts: Past & Present

The more personalized investing options for retirement plans have been around for two decades. Will they finally take off?
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Art by OYOW

Managed accounts have been a defined contribution plan option for more than 20 years.

Wilshire Advisors LLC’s November 2023 report, “The Future of DC: Personalized Investing,” noted that the Department of Labor’s 2001 advisory opinion on SunAmerica’s plan offering was “a transformative event” that clarified the use of customized portfolios for participants. The Pension Protection Act of 2006 provided subsequent validation by allowing managed accounts to serve as plans’ qualified default investment alternative.

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These favorable rulings led to the greater availability of managed accounts in plans. Vanguard’’s “How America Saves 2023” report found that 77% of plans offered managed accounts in 2022, up from 57% in 2018.

Elizabeth Chiffer, a retirement analyst at Cerulli Associates in Boston, says the nine largest defined contribution managed account sponsors reported assets of $434.6 billion in the second quarter of 2023, an increase from $316.7 billion in 2022’’s second quarter. The three largest DC managed account sponsors, according to Cerulli’s leaderboard, are Edelman Financial Engines, Morningstar and Fidelity.

Managed accounts’ proponents maintain that the accounts have several advantages over target-date funds. Todd Lacey, chief revenue officer with Stadion Money Management, which is owned by Smart Pension Ltd., in Watkinsville, Georgia, says that while TDFs generally base portfolio allocations solely on estimated retirement ages, managed accounts’ investments can be customized for a participant’s individual risk tolerance, non-plan account balances and other factors.

Direct return comparisons for managed accounts versus TDFs can be hard to come by, in part because providers note that managed accounts go beyond returns to providing specific suggestions and needs for the participant’s specific situation. That said, Alight issued research showing a 10-year analysis from  2007 to 2016 found that returns for participants using a managed account were 0.27% higher, net of fees, per year than for people that did not use them.

Nonetheless, participants have not flocked to managed accounts. Vanguard reported that the overall percentage of participants using the accounts has increased slowly, from 4% in 2014 to 8% in 2018 and 9% in 2022.

The Wilshire report highlights several factors for the accounts’ low usage versus target date funds. These include: higher fees charged to defaulted participants when compared to TDFs, the fiduciary risk for advisers and sponsors in making them a default in plan design and a lack of robust advice for the decumulation phase. Wilshire analysts, however, believe there has been progress in addressing these issues for managed accounts in recent years, predicting as high as an 80% adoption rate of the vehicle among plan sponsors by 2030.

“We believe the market share of plan assets will increase as pricing differentials relative to TDFs compress and as participant populations age, increasing the need for advice,” the report stated.

The Price Hurdle

Steve McCoy, the CEO and chief compliance officer of iJoin in Scottsdale, Arizona, says early managed account providers’ service models and cost structures led to relatively high fees. The providers could not fully leverage technology and automation, resulting in service models that involved more one-on-one client participant consultations, meaning more costs for staffing and administration.

McCoy cites Morningstar as pioneering the use of technology and furthering solutions that enhanced advisers’ value proposition when using the accounts with automated wealth management that adjusts depending on participant inputs. Advances in this plan-related technology have, in turn, helped reduce fees, McCoy notes.

Tom Kmak, the CEO of Tigard, Oregon-based Fiduciary Decisions, agrees that pricing is an obstacle. Kmak says sponsors have been reluctant to default a participant into an advice program that in the past would might have charged as much as 100 basis points, or 1% of assets. Kmak emphasizes, however, that managed accounts’ fees have declined: “The pricing has definitely come down; our data has shown that without a doubt.”

These days, Lacey says managed accounts’ fees typically range from 0.1% to 0.7% of assets. Pricing strategies can differ, he explains. Some providers charge one fee across all participant balances that are in a managed account, while others charge a per-participant rate based on each account’s assets. Others charge a fixed-dollar minimum fee or a fixed per-participant fee.

In terms of suboptimal engagement, expanded data availability and improved data integration are potential solutions. Lacey says Stadion works with about 15 recordkeepers, and the firm’s technology team has built direct integration into the recordkeepers’ platforms. The result is that Stadion receives participants’ data daily to construct portfolios.

“Twenty-five years ago, it was a bit more rudimentary,” Lacey explains. “You didn’t have as sophisticated technology integrations. Because of that technology development and recordkeeping capabilities, you’re now seeing more data points, more personalization, more sophistication within managed accounts.”

Lacey says the combination of lower fees and increased data availability from recordkeeping systems address some of the traditional adoption hurdles and make managed accounts more attractive QDIA options. “Without a participant engaging at all, based on the data we get, we can auto-personalize for a participant at a very reasonable price,” he says.

Looking Ahead

Sources and industry analysts expect greater managed account adoption for several reasons. Wilshire noted, “Comprehensive advice is a key differentiator of managed accounts, helping participants know how much to save, how to invest, when to retire, how much to spend and from which accounts.”

McCoy says  a focus on retirement income will boost managed accounts.

“Guaranteed plan income is a trend that’s accelerating in our industry,” he says. “A lot of managed account solutions that you will continue to see come to market will have the option to include an allocation to a guaranteed in-plan annuity or income solution.”

Delivering personalized advice to participants dovetails with the growth in adviser-managed accounts as a business model. Wilshire, in its DC report, maintained this transition will “amplify the role and value of the advisor, who will increasingly provide advice not just at the plan, but also [the] participant level.”

AMAs will also expand client service opportunities, according to Wilshire, including “comprehensive financial planning services, financial wellness offerings and advice with respect to insurance products, including whether to purchase life, disability, and especially longevity insurance.”

The ability to benchmark managed accounts is another positive development for managed account proponents. It was always possible to compare accounts’ fees, but considering price alone overlooked plans’ additional features. In November 2023, Fiduciary Decisions announced the development of a new report that benchmarks more comprehensive metrics for DC-plan-managed accounts. In addition to pricing, the report evaluates account provider quality, services, participant success measures and engagement, and extra services.

Products February 1, 2024

Are Managed Accounts Good for Less Wealthy Retirees?

Industry experts discuss the benefits and disadvantages of managed accounts for those near or in retirement who may not be able to afford an individual adviser.
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Art by OYOW

Many plan advisers and their clients have chosen to make managed accounts available to participants either as an opt-in, or a default. Overall, about 38% of plan sponsors say they offer a managed account service for participants, according to PLANSPONSOR’s 2024 Defined Contribution Benchmarking Report.

Whether offering them or not, many sponsors appear to be turning to retirement plan advisers for thoughts on the offerings: In a ranking of third-party service value, with 1 the least useful and 5 the most useful, plan sponsors ranked “help in selecting and monitoring a managed account service” a 3.4, according to the same report.

As the retirement industry is looking for ways to help retirees manage their decumulation stage, Larry Deatherage, a managing director at SageView Advisory Group, sees managed accounts as a useful vehicle for retirees or near-retirees.

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“I think once you’ve been in the retirement phase, working with individual advisers really helps pay off, but not everybody can afford or have access to an adviser,” says San Diego-based Deatherage. “So managed accounts can fill that void pretty nicely.”

Engagement Needed

For the tool to work, however, Deatherage notes that an individual must use the managed account to its fullest. If a participant is not actively engaging in the managed account process, “you’re not going to get the best advice out of that program,” he says.

He also emphasizes the usefulness of managed accounts in decumulation, a key area for the retirement plan industry as more people retire with 401(k) assets as their primary payout vehicle. In-plan retirement income products, such as annuities, are starting to be added into solutions with managed accounts, Deatherage says, as one of multiple options available to the country’s largest retirement cohort, Baby Boomers.

“I’m definitely not saying we’re totally on board with that yet, but certainly the industry is heading that way: Participants are getting to or are in retirement with a managed account solution,” he says.

Brett Fischer, assistant vice president and head of investment product strategy at Principal Financial Group, believes the more personalized the experience, the more success individuals will have in meeting long-term financial security and retirement goals. While a managed account can add more personalized management than a target-date fund or other investment holding, it also can have limitations for more complex financial needs.

“If the participant has other assets outside the retirement plan with another provider, having them in multiple places, versus consolidated, does require a bit more effort to manage, even though the managed account solution is set up to do that for them,” Fischer says.

When considering staying in a managed account within a plan or rolling out altogether but staying with an adviser, Tony Franchimone, another managing director at SageView, says the decision depends entirely on the individual.

In most cases, if the individual wants to and can work with an adviser, that adviser will try to get the retiree to roll out, in order to manage the portfolio themselves. That said, a client can work with an adviser while staying in-plan by paying a “planning fee.” In that scenario, the investor benefits from staying in a managed account in the plan and paying 0.3% to 0.4% (30 to 40 basis points) of managed assets, as opposed to 1%. A fixed-income portfolio, however, may yield a different result; there is no answer that works across the board.

“If it’s a 100% fixed-income portfolio, and it’s around a million dollars, you might be able to be around 75 basis points [with an adviser],” Franchimone says. “But if you look at pure costs, leave it in the plan. Again, it depends on that person.”

Levels of Service

However, Franchimone says that if an individual wants to talk to an adviser every single day, staying in-plan and paying the discounted 40-basis-points rate would not be an option.

“I wouldn’t expect him to take my call every single day,” Franchimone says. “If I pay him 1.5% and I’m texting him or calling him or whatever, I’m going to expect that he’s going to get back. So how much personalization and engagement do you want to have? I think that has a lot to do with it.”

When it comes to an age threshold or an asset amount at which people should go into a managed account, Deatherage cites—and agrees with—industry white papers that state people age 40 and older can achieve significant value with a managed account.

Fischer of Principal notes that not just being further along in your career, but going through life changes, can be a good reason to be in a managed account.

“Career goals, or maybe I would say career successes, are when people potentially start to earn more money and are saving more money,” Fischer says. “They want to understand what to do with that money and how it should be invested.”

Life events such as having a child and wanting to pay for higher education can often be a driver of such changes.

“How does that play with saving for retirement?” he asks. “Managed accounts can kind of help you with all those decisions, where you’re adequately saving for retirement, but also taking care of other financial goals you have outside of your retirement.”

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