Retirement Industry Sees New Possibilities for Managed Accounts

Managed accounts are often seen as highly personalized and customizable investment vehicles that can closely match risk taking and risk tolerance; despite a growing number of managed account offerings from providers, however, usage of the investment vehicle is still somewhat low.

Tim McCabe, national sales manager at Stadion Money Management, is squarely in the camp that would like to see managed account usage grow significantly. He estimates the market share for managed accounts (i.e., the number of plan participants who currently own managed accounts) to be around 6%. Matt Brancato, head of Vanguard DC Advisory Services, puts that number even lower, at 4%.

McCabe attributes this low engagement to certain “hurdles” the industry needs to overcome, including the high fees historically associated with managed accounts and the complexity they’re often perceived with. Nonetheless, he says certain advantages such as new technological innovations and more advanced/responsive asset-allocation strategies make modern managed accounts a compelling competitor for a given retirement plan’s qualified default investment alternative (QDIA). 

Stadion, for example, has built out a solution called StoryLine. This managed account utilizes underlying exchange-traded funds (ETFs) rather than the mutual funds typically available in plan sponsor investment menus to achieve significant cost savings. 

“Managed account providers will always charge an overlaying fee on top of the funds in the plan,” explains Stadion CEO Jud Doherty. “Historically that has made it difficult to compete with some of the lower cost options, such as indexed target-date funds. In our case, we use a pool of ETFs to build the managed account, and they’re generally much less expensive than the funds in the plan.”

McCabe explains that, by using ETFs in the StoryLine managed accounts that range between eight and 18 basis points, “it makes the proposition of building and offering managed accounts a lot less expensive.” He says this method brings down the costs of StoryLine to levels “far below what the firm could have charged a decade ago.”

NEXT: Managed account basics have evolved

Leveraging the ETF structure, Stadion is able to deliver managed accounts that are within about 10 basis points of the average fee for an off-the-shelf TDF, McCabe says, “and with that you’re getting fiduciary protection, phone service, and field support.” 

Since StoryLine was launched last spring, Stadion says it has signed on about 500 plan sponsors. McCabe says clients responded strongly to the simplified onboarding process and what he calls the program's “robo-like” features, used to gauge and then manage client risk tolerance. At the very start, Stadion provides participants with a 9-point questionnaire based on behavioral finance concepts. Then, through the plan’s online interface, participants can also add outside assets and access models estimating what retirement income would look like after changing contribution levels.

“We kept it very simple and user friendly,” says McCabe. “The questions deal with how they feel about investments. They ask things like ‘are they less risky or more risky than their friends?’ In doing that, we feel we have a good gauge of what their risk tolerance is. And if we do that, we can get them in the right glide path during their working life; so, they’re going to stay in that asset allocation as opposed to not knowing what they’re getting or getting something that doesn’t match their risk tolerance.”

Both Doherty and McCabe acknowledged that managed accounts still have a long way to go in terms of catching up to the popularity of TDFs. In fact, some providers are encouraging a type of hybrid approaching bringing together the best of both worlds. 

“We think that target date accounts and managed accounts work really well together,” says Matt Brancato, head of Vanguard DC Advisory Services at Vanguard. “We encourage plan sponsors to include both of them in a plan. They should use the TDF as default for all investors. That improves the starting point in terms of asset allocation at a very low fee. Then the role of the managed account comes into play as participants build more assets and get more engaged.”

Brancato stresses that managed accounts are most valuable when participants are most actively engaged with these vehicles, which typically happens as their account values and working tenure grow. 

“In order to get the most value out of a managed account, you have to be quite engaged in the retirement process and very few investors before they’re close to retirement are engaged enough in managed accounts to get the real value out of it,” he explains. 

NEXT: Education is vital

One of the biggest barriers to managed account enrollment is the fact that many plan participants simply don’t know that much about them, or they lack the skills needed to actively manage these accounts. This issue gives employers and plan sponsors key opportunities to better educate participants.

In light of recent market volatility, managed accounts could gain momentum if they can prove to be better “shock absorbers” compared with TDFs or other options, argues Sangeeta Moorjani, senior vice president of Fidelity’s Professional Services Group.

Like Stadion, Fidelity sees plenty of fuel for managed account momentum, but notes that participants widely need more information about these investment vehicles and how to use them. According to Fidelity’s client service data collected earlier this year, 39% of those surveyed who were not investing into a managed account suggested they didn't understand the offering, and 25% said this lack of knowledge is a major obstacle to future engagement. However, 52% said they would find one useful after being educated on managed accounts.

McCabe suspects that managed accounts will grow in popularity, especially as the Department of Labor’s Conflict of Interest mandate or fiduciary rule goes into effect. He predicts some platform providers may start to offer multiple managed accounts to improve choice (and fiduciary protection) for plan sponsors. 

“If the platforms are only offering one managed account, or it’s a proprietary managed account, they are nervous that this could be construed as a recommendation,” explains McCabe. “They don’t want to be seen as offering a single solution, so what we’re seeing is that a good number of well-known national providers are moving towards having two or even three managed account offerings.” 

He adds, “Before, it seemed like one was plenty. Now, it looks like two or three is going to be the norm, and that makes me optimistic that our area of the business is going to grow dramatically in the next three or four years.”

“We see a lot of evolution in that front,” Brancato agrees. “There are a lot of great managed account programs today. It’ll be interesting to see where we go from a technology standpoint. And looking at all sorts of different options that can be incorporated into a managed account, I don’t think in five years it’s going to be the same industry that we see today.”