Do Managed Accounts Need a Rebrand?

Managed accounts appear to work well for participants who use them, but may still be “lost in translation” when it comes to uptake and use, according to a new white paper by Cerulli Associates sponsored by the managed account provider Edelman Financial Engines.

To approach the subject of defined contribution managed accounts—which, for a fee, offer plan participants more personalized investing along with advice—the researchers sought to focus on users versus non-users, drawing on a sample of 823 active 401(k) plan participants across a range of age, gender, total investable assets and retirement assets.

Brendan Powers

“DC-managed accounts have been around for a long time, and everyone knows what they are in the industry,” says Brendan Powers, director of product development at Cerulli. “We wanted to tackle the perspective of the end client, the 401(k) participant …. to look at managed accounts through that lens to help the industry better position them as a solution.

What the researchers found was a stark contrast between 401(k) savers not in managed accounts versus those who leverage them, as shown through these statistics:

• 16% of non-managed account users reported feeling confident in their retirement investment strategy, as compared to
• 47% of those using managed accounts reported feeling very confident in their retirement strategy.

In the meantime, Cerulli found that a little over half (53%) of participants would prefer an employer-selected advice solution if they had access to one.

Those signs would point to strong uptake of managed accounts; but growth, while strong recently, has been somewhat slow in DC managed accounts as compared to those outside of workplace retirement plans. As of year-end 2023, the top-nine DC managed account sponsors held $470.6 billion in DC AUM, according to Cerulli data.

Misunderstood Manager

Where, then, is the disconnect? According to Powers, the issue may be one of misunderstanding among participants—and potentially plan sponsors—about the human advice element of managed accounts that go beyond investment outcomes.

“Those that use a DC-managed account really value the ability to talk to someone—the investment piece is important, of course, even critical—but the ability to have someone listen to your goals, aspirations, and challenges is crucial,” he says. “That is where people can be helped to not make emotional, rash decisions or mistakes—and a lot of folks don’t know that [managed accounts] give them access to that.”

To back up that thesis, Cerulli points to the fact that 50% of managed account users point to the human-to-human interactions offered through the solution as the most valuable feature. That was followed by being offered comprehensive financial services (26%), having access to sophisticated investment strategies and products (22%), the fees paid—lower than an individual financial planner—(19%), and the ability to offload financial responsibilities (18%).

Powers notes that not all participants will want or need the human advice component of a managed account, either because they will do it on their own or because they’re going to work with an individual adviser. But, he argues, there is a large swath of people who could benefit from a relatively low-cost advice option, with 70% of those being surveyed feeling an adviser would do a better job with their finances than they can.

“DC-managed accounts is not the right solution for everyone,” he says. “But there is an underserved group that doesn’t understand selecting investments and may have bad habits related to emotional and cognitive decisions around finances. An adviser will cost them up to 200 basis points, and they may feel that fee is too high, and they can’t afford it; DC-managed account fees in comparison are very, very low.”

When addressing cost, often the key knock against managed accounts in terms of eroding overall retirement savings and security, Powers agrees that plan fiduciaries are very “cost conscious” and focused on whether the fees are worth it against a target-date fund and free educational resources. That conversation, he says, comes down to the value and potential piece of mind of access to advice.

“For many who are cost-conscious, they may ask whether something like a robo adviser is worth it, but when they learn, they can speak to a human adviser it’s not just about the cost, but the value that they can get from that interaction,” he says.

Benefit Focus

In its current state, Cerulli believes the market frames up managed accounts only as an investment benefit to provide better risk-adjusted returns and to combat volatility. Instead, it advises emphasizing the product along three key pillars:

• An “employee benefit” that includes both investment product solutions and human advice;
• a lower-cost alternative to advice solutions when compared to external options; and
• an employer-approved program that is being provided after a selection process.

Participant education, according to the findings, may need to take an even further step back when it comes to understanding and engagement. About 50% of participants gave the incorrect definition of a managed account, 39% gave an incorrect definition of a TDF. That compared to 29% giving the correct definition of a managed account and 33% giving the right definition of a TDF; another 21% weren’t sure what a managed account was, and 28% weren’t sure about the definition of a TDF.

Of course, a push toward managed accounts may not sit as well with financial advisories seeking to provide individual, holistic services. But Cerulli also points to the fact that many participants (41%) don’t believe they have enough investable assets to merit hiring an external adviser. For this group, Powers argues, the solution may be a good option.

“We think the industry at large could take a better position on discussing DC-managed accounts to help educate those participants who don’t understand the jargon,” he says. “There are segments of investors who can really use this service and we believe managed accounts are a great solution for plan sponsors to have in their toolkit.”