Managed Accounts' Value

When solving issues at the plan level or those related to participation and diversified investments, the defined contribution (DC) industry historically has done “a pretty good job,” says Jessica Sclafani, director of retirement research at Cerulli Associates, Boston. “Now the industry is at an inflection point where we are starting to solve for the individual,” she notes. “A managed account solution speaks to the desire to customize a retirement account to reflect the needs of a single participant.”

Managed accounts providing individualized advice have been around for a long time, and there are many versions available, but they have seen little uptake: When the vehicle does not serve as a plan’s qualified default investment alternative (QDIA), participation rates get stuck in the 5% to 10% range, consultants observe.

For sponsors, the resistance is that these accounts, with their additional services, cost more than a target-date fund (TDF), and it is not always clear how effectively they meet participants’ goals for return and risk. Moreover, some advisers may fear the accounts encroach on their role of providing advice to participants. But managed account providers are working to overcome all of these obstacles.

Managed account services are based on the belief that some investors are better served by portfolios designed to suit their individual circumstances. But not all investors, maintains Jason Shapiro, senior investment consultant at Willis Towers Watson in New York City. “A target-date fund’s glide path is like a ‘best fit’ line. If a reasonable allocation for a given participant is close to the line, a target-date fund might make a lot of sense, but if he’s far away from the best fit, he might be better off with the customized advice of a managed account.” Participants near or in retirement, or with a complex financial situation, are the strongest candidates for a managed account.

“The effectiveness of managed accounts is determined by the quality of information they can gather on participants,” notes Corby Dall, head of 401(k) Advisors Intermountain, an advisory firm in Sandy, Utah, and a 2017 PLANSPONSOR Retirement Plan Adviser of the Year. “I promote managed accounts in certain instances, where we meet, one-on-one, and the participant can ask questions and provide more information.”

Getting participants involved is the prime objective for managed accounts, Shapiro says. “Most providers can demonstrate that engaged participants will save more, be smarter about their retirement date, use after-tax accounts at higher levels, and follow a strategy to optimize what they get from Social Security. That engagement is where you get the most value.”

The customization comes at a cost, though. “It’s not uncommon to see managed account fees of 40 to 50 basis points [bps], and that’s just for the professional management. You still have to pay for the underlying investments,” Shapiro says.

Essential to the managed account value proposition is an assessment of a participant’s risk profile, typically through a questionnaire inquiring on the size of losses a person can tolerate. Stadion Money Management of Watkinsville, Georgia, turned to university professors in finance and psychology to develop a compact, nine-question survey to divine each person’s likelihood of pulling out of his investments during turbulent markets.

Dall, however, is skeptical of their accuracy. “I find that people’s risk tolerance changes with the ‘flavor of the day’—that is, recent moves in the markets,” he says.

Moreover, only a few managed account solutions have addressed the key challenge facing their target market: converting employment years’ savings into retirement income. “Managed accounts would be a good home for a range of retirement income products, but there has been very little movement in the industry in the last five years,” Shapiro says. “When those solutions do arrive, sponsors and their advisers will have to assess whether their provider is expert in modeling those products and helping retirees with those decisions. That’s very different from investing in public equities and bonds.”

Addressing the ‘Advice’ Issue

Managed accounts represent serious competition for plan advisers, many of whom have built their practice on a close interaction with participants, and the very sort of advice managed accounts dispense. Accordingly, some providers have designed their services to enhance advisers’ own value propositions through their managed account technology.

Stadion has dedicated its StoryLine managed account service exclusively for the adviser market, says Todd Lacey, chief business development officer of the firm’s retirement unit. The service is not a fully individualized managed account but provides six different glide paths and maps the participant into one based on his risk questionnaire responses, like a model portfolio arrangement would do. From there, it adjusts allocations each year, like a target-date fund would.

“The adviser doesn’t have to meet with each person and build an allocation,” Lacey says. “We find that a lot of advisers focus on the plan-level work of plan design, investments and vendor searches but don’t necessarily want to build individual portfolios. We let them handle the plan side, and we sign on as a participant-level 3(38) fiduciary, taking discretion over the participant accounts.” Stadion’s next-generation products will enable advisers to select funds that go into the company’s portfolios and to set their own glide paths.

Schwab Retirement Plan Services has developed adviser managed accounts. “The adviser remains the fiduciary and decides on an appropriate portfolio for the participant, the way [advisers] have forever, with one-on-ones and group sessions,” says Nathan Voris, the firm’s managing director of business strategy, in Richfield, Ohio. “They can also let the participant do that on his own, using the adviser’s intellectual property and portfolio modeling.”

He adds: “For advisers who are not able to meet with all participants, it’s a great tool that leverages technology to cover the entire plan. We recognize that it takes a while for advisers to get comfortable with the due diligence of managed accounts. This service opens that up and encourages them to look again.”

Plan advisers can assist sponsors deliberating the managed account decision, in several ways. “First, they can help sponsors understand how the algorithm the managed account engine uses for asset allocation aligns with the plan’s investment structure,” notes Martha Tejera, head of consultants at Tejera & Associates, in Seattle.

Tejera also says that advisers can help sponsors sort out which parties in a managed account arrangement—be they recordkeepers, account providers, asset managers or asset allocators—are being paid and how much.

“They can also help decide in an objective way how sponsors should incorporate managed accounts—whether as a QDIA or opt-in feature, and how much the sponsor should push participants into taking them,” Tejera adds. “Generally speaking, what is the point of the managed account, and then how do you deploy it to achieve that goal?”

Art by Lars Leetaru