Managed Accounts’ Default Use Limited by Litigation Fears, Fees

New research shows that managed accounts are facing a stumbling block beyond fees and general acceptance in retirement plans: litigation fears.

Defaulting retirement participants into a managed account either immediately or after they reach a threshold of either age or assets, can offer a more personalized investment experience and potentially better outcomes. But retirement benefit consultants considering the option are often turned off not just by higher fees, but by litigation concerns, according to Sway Research’s most recent defined contribution investment only report.

The research showed that “there’s a lot of concern around managed accounts and litigation risk, in addition to fees,” says Chris Brown, founder and principal of Sway Research, who surveyed 20 DCIO sales leads, as well as 207 retirement plan advisers and benefits consultants, in compiling the report.

When asked to rate the “level of litigation risk” for management accounts, 22% of plan advisers (those overseeing at least $10 million in plan assets) saw litigation risk as high or significant, with another 37% seeing it as unlikely, but agreeing that “concern is warranted,” according to the research. Those figures were higher for retirement benefit consultants (those overseeing on average $1.2 billion in plan assets), with 47% seeing high or significant risk, and 29% seeing it as unlikely, but still concerning.

Along with litigation concerns, the cost of managed accounts, as compared to TDFs, remains a stumbling block for many advisers as well, according to Sway.

When asked if adviser-managed accounts offered by Edelman Financial Engines and Morningstar are “too expensive” relative to TDFs, 43% of respondents either agreed or strongly agreed, with 39% neither agreeing or disagreeing and 18% disagreeing. Among retirement benefit consultants, those figures came in at 66% strongly agreeing or agreeing, 19% neither agreeing or disagreeing, and 15% either disagreeing or strongly disagreeing.

QDIA Resistance

Asked if they were offering managed account solutions as a qualified default investment alternative in at least one plan, 17% of advisers said they were, along with 19% of benefits consultants.

TDF use as a QDIA in a least one plan, however, dwarfed those usage figures. Third-party TDFs were the most likely to be used in at least one plan as the QDIA among plan advisers at 80%, followed by TDF portfolios from the plan’s recordkeeper at 64%. Those figures were 88% and 79%, respectively, from the benefit consultants.

Brown notes that despite DCIO providers working to show the benefits of managed accounts in DC plans, adviser concerns appear to be outweighing that push.

“They’re a good product for people that want them, and they are important products,” Brown says. “But for DCIOs, a lot of the hope for firms that don’t have a big target-date practice would be that [managed accounts] are used as a QDIA … but that is not happening.”

TDFs currently make up one-third of all DC assets, according to Sway’s estimates. Meanwhile, managed account providers Edelman Financial Engines and Morningstar made up about 4% of total DC market assets at the end of 2022, according to the firm.

“Managed accounts are gaining DC asset share, but the pace of these gains is miniscule relative to the size of the overall DC market,” the research firm wrote in the report.

A separate DC consulting study released by investment management firm PIMCO on Wednesday found skepticism among advisers that participants add enough personal data to fully utilize managed account tools. In a survey of 36 institutional consultant and aggregator firms, only 11% of advisers strongly agreed that participants “regularly add and keep current personal data in managed account tools.”

CITs Continue Down-Market

The Sway researchers did find one area of continued growth among DCIO providers: collective investment trusts. These pooled investments held by a bank or trust are only available for DC plans and are often cheaper and potentially more flexible than mutual funds.

Among 20 DCIO sales leads at asset managers surveyed by Sway, 20% noted gross sales from collective trusts, as opposed to just 8% in 2018. Meanwhile, 69% of sales are coming via mutual funds, as opposed to 83% five years ago.

The interest in CITs, which had initially been strong in large plans, has moved further down-market, according to Sway’s report. DCIOs estimated that 22% of current CIT-based sales are being generated by plans with less than $50 million of assets under management, and another 23% from plans between $50 million and $100 million.

The widespread push toward CITs, Brown notes, follows a consistent goal in recent years by DCIOs to lower expenses in DC plans. In this year’s report, 78% of asset managers noted fees as a top-five priority heading into 2024.

Here, too, litigation plays a role, as legal challenges often scrutinize fees charged to participants.

“A lot of [the litigation] may be targeting half-a-billion dollar plans,” Brown notes. “But people feel like everything works its way down, and soon it will come to smaller plans as well.”