Managed Accounts vs. TDFs: Is the MA Cost to Participants Worth It?

Retirement plan advisers speaking at a workshop on Monday agreed that providing participants with managed accounts can produce better retirement saving outcomes for participants, but whether it’s always worth the cost is still an open question.

As the target-date fund has evolved, there are many flavors and colors to meet the needs of participants, Kathleen Kelly, managing partner at Compass Financial Partners, a Marsh McLennan Agency LLC, told a room of advisers at the National Association of Plan Advisors national conference.

“TDFs, in our belief, for the majority of plan participants, are the right fit,” she said. “It presents a low-cost, professionally managed account that comes in all different shapes and sizes. As long as we as advisers are doing our job, for the most part we can find the right fit.”

Kelly said there are certainly opportunities when a managed account is worth the higher fees for a participant, particularly as people work longer and change companies or even careers. That said, the investment option of a TDF is still an incredibly powerful instrument with a proven track record, whereas the managed account is more of an add-on feature depending on participant need.

“It is a service, not an investment option,” Kelly said of managed accounts. “You are making a determination as to whether you want to present it to your client. … The investment option of the TDF is going to stay, regardless.”

Jason Chepenik, senior vice president of retirement and wealth at OneDigital, did not disagree with the strength of TDFs, but he said he has come around in recent years to see the high value of offering managed accounts to clients.

“A TDF is designed for the average person—when you don’t have much money and you can automatically enroll in a plan, a TDF is a terrific instrument,” he said. “But when you have an employee that hits age 50 and has accumulated some savings, they need something else. … we need to be able to get them the advice and tools to prepare for that next stage of life.”

Chepenik said many plan sponsor committees are looking to build and improve upon their plan offerings. As an adviser, he recommends considering the engagement and commitment of the plan sponsor committee in terms of being able to successfully offer a managed account in a way that gets engagement and use from participants.

“Some committees are really looking to do more than the average,” he said. “Other committees are in the meetings and on their phones, not paying attention. … I try to measure the IQ of a committee as to how engaged they are in the process. A managed account is a great add-on for those that are engaged.”

If You Build It …

Kelly said that even if a participant is put into a managed account, it does not always mean they will utilize the option. Rather than assume a participant must be moved into a managed account as they age, there’s also the option for them to move into a TDF more appropriate for their situation.

Kelly noted that her firm has, at times, looked at the participant pool for a plan sponsor and done a re-enrollment exercise offering more appropriate TDF options to push for engagement and uptake. Meanwhile, the managed account is offered as an option a participant can engage with if they would like, but her advisory does not provide it as a qualified default investment alternative setting in the plan.

“We do not have any clients who have a managed account as a QDIA,” she said. “If it were free with no additional expenses, that may be worth it, but it’s not free.”

Chepenik, of OneDigital, said his firm has worked with plan sponsors on using the managed account as a dynamic QDIA set to an appropriate age and compensation level. But they have only done it with plan sponsors committed to implementing it correctly and who are ready to “swing with a big stick.”

“The plan sponsor is in this battle to keep their employees happy and keep them on track,” he said. “Based on the data of having a managed account, we should be able to improve the overall metrics of that plan.”

Dynamic QDIA

Last Friday, Principal Financial Group announced a new dynamic QDIA available to advisers and plan sponsors that begins with a TDF and moves to a managed account default option at a transition age set by the sponsor. Once the participant hits that age level, they will be put into a program providing investment strategies based on contribution levels, account balance, social security benefit projections and other factors and goals the participant inputs.

“We’ve been a huge champion of TDFs for a long time, and we still think they very much have their place,” says Teresa Hassara, senior vice president for workplace savings and retirement solutions at Principal. “We think, though, as the need and the desire for personalization and advice grows in our ever-more-complicated world, this product allows us to meet people where they are.”

Hassara said the TDF is a great tool as workers start out in their careers, but as they get older, changing needs and goals require more personalized attention. Principal recommends the age of 45 to trigger the shift into a managed account, but plan sponsors can ultimately decide the age based on their participant pool.

“Essentially there are two QDIAs: There’s the target date to start with, and then there is the managed account,” she said. “They have a choice, though, so if they don’t want to go into that product, they don’t have to.”

Hassara said the strength of the managed account when a participant is older is the accumulation of information on their activity and preferences. “We have more information about their salary, we have more information about how they’ve accumulated, we have more information about their deferral rate,” Hassara said. ”We have that information that can help us refine, refine and refine the solution.”

Hassara cited Principal research showing that 81% of people feel uncomfortable when making financial decisions and 54% of workers don’t know when to engage a financial professional.

“You look at that, and you think: ‘We can help them get to better outcomes,’” she says. “That research, our participant experience, talking to advisers … has given us the feedback that this is the next generation [of offerings].”

Principal’s surveying found that, going into 2023, 86% of plan sponsors and 76% of financial professionals believe the most common default option by 2030 will likely be a target-date fund with a managed account service.