DC Advisers: Managed Accounts Not Yet Default Threat to TDFs

Defined contribution advisers are still favoring target-date solutions as the default option in retirement plans despite an industry push toward more personalized—but also more expensive—managed accounts, according to research released Wednesday by T. Rowe Price.

In the financial services firm’s third annual DC research study, those who self-identified as retirement plan advisers were more bullish on managed accounts as a concept as compared with those who identified as retirement consultants, but neither cohort was bullish on using them as the default retirement setting.

“On the whole, neither cohort has a high conviction for using a managed account as a QDIA,” says Jessica Sclafani, a senior defined contribution strategist at T. Rowe Price.

The report, which surveyed 32 defined contribution consulting and advisory firms, found a roughly medium level of support for using dynamic or hybrid QDIAs that shift participants into a managed account and a score closer to “do not support” for implementing them as the plan default. 

The results come even as more providers are offering managed accounts as default options and hybrid options to meet the call for more personalized retirement plan advice. But Sclafani notes that managed accounts as default options are still relatively new offerings and that higher fees continue to be a concern, particularly if a participant pool does not need the added “bells and whistles.”

“We do believe that this trend will be worth watching, particularly as the DC community explores in-plan retirement income programs,” she says.

Retirement Income

The T. Rowe study did find that managed accounts were a more sought-after option for both advisers and consultants when looking at adding a retirement income option.

In that scenario, the study found that plan sponsor clients are still leaning toward more traditional, systematic withdrawal for participants to manage retirement income. That option was closely followed, however, by managed accounts with income planning features. The third-most popular offering was a target-date investment with an embedded, non-insured managed payout feature.

Overall, Sclafani and the researchers reported a shift in views on retirement income moving from an “exploratory mindset” toward in-plan retirement income solution to a “more decision-oriented posture.”

“The strategies or plan design features that received the highest scores were those that executed a paycheck like experience for participants,” Sclafani says. “Respondents were interested in solutions that helped participants take a lump sum and convert it into a stream of income into retirement.”

That stance was reflected in the fact that 24% of those surveyed said clients have no opinion of in-plan retirement income options, as compared with 59% having no opinion in 2021. Additionally, 19% of respondents said clients are offering or planning to add a retirement income solution this year, as opposed to 8% in 2021.

Similar to managed accounts, Sclafani says it is not surprising to see that systematic withdrawals—as opposed to an insurance-back income option—still leads the category. While the original 2019 Setting Every Community Up for Retirement Enhancement Act made in-plan retirement income annuities a more viable option, adding them is still a bit like “jumping into the deep end.”

“We believe retirement income will be included in a multi-year process that is iterative and will include a variety of plan design features, access to advice and potentially insured solutions,” she says.

The Inflation Factor

Retirement advisers say their clients have been responding to the recent inflationary environment when it comes to plans, according to the report. To that end, the study found that more plan sponsor clients have supported adding nontraditional bonds to retirement plan lineups to find additional growth. Among those surveyed, about three out of four expressed interest in nontraditional bonds being added to target-date lineups.

The interest in these actively managed, nontraditional, fixed-income investments, Sclafani says, was also likely in part due to traditional bond values falling, such as those tracked in the U.S. Aggregate Bond Index declining in 2022 along with equities.

“2022 was still burned into people’s brains,” Sclafani says. “With that market context, a consistent theme throughout this study was consultant and adviser focus identifying diverse [investment] activity.”

That push for diversity, however, did not lead to significant interest in alternative assets such as private equity or liquid alternatives: Only about one out of four respondents supported adding those types of investments into DC plan menus.

“Despite the recent inflationary environment, study results reveal only moderate support for adding or increasing allocations to traditional inflation-sensitive strategies in target-date portfolios,” T. Rowe researchers wrote in the report.

The report showed that fee pressure in regard to TDF offerings continues for advisers when working with clients. Many advisers noted a continued shift to offering collective investment trusts in retirement plan menus, as the DC-only investment platform can offer lower fees.

T. Rowe Price’s 2023 Defined Contribution Research Study was conducted by T. Rowe Price in partnership with the Schaus Group LLC and included 32 defined contribution consulting and advisory firms representing more than 171,000 plan sponsor clients and more than $6.7 trillion in assets under advisement, surveyed from February 14 through March 31.