How Managed Accounts and TDFs Can Live in Harmony

Recent research from Cerulli Associates takes a critical look at the use of managed accounts in the defined contribution (DC) market, now estimated at $5.2 trillion. As the DC market matures, Cerulli notes that the asset management industry continues to reassess and measure the efficacy of a target-date product as the primary retirement investment solution for most savers, according to “Retirement Markets 2015: Growth Opportunities in Maturing Markets.” 

At the same time, other investment vehicles, such as managed accounts, come in for their share of assessment for their place in a retirement plan. Managed accounts will likely do better in DC plans if they are presented as a service instead of just another investment option, says Jessica Sclafani, associate director at Cerulli. These accounts should complement target-date funds (TDFs), she notes, rather than jockeying for top position.

Managed accounts, are now increasing in popularity and becoming more sophisticated in their use of technology, even as retirement plans find the due diligence in product selection somewhat challenging. The Government Accountability Office (GAO) noted last year that a lack of guidance and inconsistent information about performance hamper plan sponsors in selecting and overseeing managed account providers.   

One key to using managed accounts correctly is positioning their advantages. Customization is a route to supporting improved participant outcomes, according to Sclafani. Yet the two most common qualified default investment alternatives (QDIAs)—balanced funds and TDFs—do not address financial planning and personalized strategies, she points out, while managed accounts do.

As participants’ investable assets increase, they become much more interested in planning and strategies tailored to their specific situations, explaining why managed accounts attract so much interest in the DC industry.

Managed accounts may not be right for all participants, the report says. Participants who are nearing retirement, have amassed outside assets and are looking for additional services may find them most useful. Cerulli estimates there are approximately 19.5 million households ages 45 to 69 with investable assets ranging from $100,000 to $2 million. These housesholds, which represent $9.1 trillion in investable assets, are the target market for managed account providers, according to Cerulli.

Managed account providers should partner with DC plan sponsors to make sure a managed account’s distinct advantages—access to personalized advice or the ability to incorporate assets outside the DC plan for a more holistic financial planning experience—are conveyed to participants, the report recommends.

To motivate participants to opt in to a managed account service, plan sponsors and advisers need to help them understand what they are paying for. This requires extra work from both plan sponsor and managed account provider in educating employees.

“Retirement Markets 2015: Growth Opportunities in Maturing Markets,” focuses on trends in the $21.5 trillion retirement marketplace, including assets and growth projections in the different retirement segments—private/public defined benefit plans, private/public defined contribution plans, and the individual retirement account (IRA) market. More information, including how to purchase, is on Cerulli’s website.