Retirement Insights

Managed Accounts Raise Unique Plan Governance Issues

Managed Accounts Raise Unique Plan Governance Issues

As the retirement industry begins to shift from an asset accumulation to a retirement income mindset, defined contribution (DC) plan participants and sponsors are seeking more in-plan investment options that address retirement income—an outcome that is highly personal to each plan participant. The retirement income goals for “John” are not going to be the same as for “Jane.” That is one of the primary reasons interest in managed accounts continues to increase. Studies have shown managed accounts can potentially deliver better retirement outcomes because of the level of personalization to the participant. Managed accounts are an investment service while, for example, target date funds (TDFs) are an investment option. As with all DC plan investment options, services and their providers, there are governance issues and fiduciary responsibilities plan sponsors and committees must address with managed accounts. The following roadmap or checklist provides a level of governance guidance.

What is a managed account?

A managed account is an investment and planning service a plan can offer to participants. In managed accounts, service providers deliver customized investment management of participants’ DC plan accounts as they accumulate, and sometimes as they spend down, their retirement savings. The portfolio is personalized for an individual based on a variety of factors such as age, salary, contribution rate, risk tolerance, and other assets. This option typically involves an additional fee, usually paid by the participants who choose the option.

Financial firms have offered similar investment arrangements to retail investors since the 1970s, but managed accounts have gained popularity in DC plans since 2007, when the Department of Labor (DOL) regulations provided that certain managed accounts could be used as qualified default investment alternatives (QDIAs) in DC plans. Consequently, inclusion of managed account options in DC plans have increased sharply over the last 15 years.

Managed accounts by the numbers:

  • 8 managed account providers handle 95 percent of the segment;1
  • 87 percent of DC recordkeepers offer managed accounts;2
  • 47 percent of plan sponsors offer managed accounts within their retirement plans;3
  • 54 percent of large plan sponsors offer a managed account option; 4
  • $348 billion in assets as of 2019, up from $108 billion in 2012.5

Managed Accounts vs. Advisor Managed Accounts

There are differences between a basic managed account and the more holistic advisor managed account. Under the DOL’s definition of QDIA for a retirement plan, a managed account is defined as an investment management service directed by an ERISA 3(38) investment manager, the plan trustee or the plan sponsor.6

The investment fiduciary, using the investment alternatives available under the plan and generally accepted investment theories, must allocate the participant’s plan assets to achieve varying degrees of long-term appreciation and capital preservation through a mix of equity and fixed income exposures based on the participant's age, target retirement or life expectancy. Managed accounts should be diversified to attempt to minimize the risk of large losses and should change their asset allocations and associated risk levels for an individual account over time with the objective of becoming more conservative (i.e., decreasing risk of losses) with increasing age. Asset allocation decisions for managed accounts are not required to consider risk tolerances, investments, or other preferences of an individual participant.

Think of an advisor managed account as a service that follows the same guidelines as a managed account but allows the advisor to enhance the investment menu based upon the advisor’s knowledge of the plan, plan participant’s and any other information which may be helpful in providing a more personalized experience. In addition, Advisor Managed Accounts may often utilize funds in their allocation decisions that are in addition to what is available in the core menu offering (i.e. off-menu or side-car investment options) as well as more sophisticated technology in their efforts to achieve improved outcomes.

Todd Kading, Chief Executive Officer of LeafHouse (one of the largest national, third-party investment fiduciaries for retirement plans) provides further insight into the inner workings of managed accounts and the following key questions for consideration. “Opinions differ as to what a fiduciary should consider when monitoring managed accounts,” observes Mr. Kading. “At LeafHouse, we believe the following should be answered to determine the appropriateness of managed accounts for each plan.”

  1. Is the managed account service truly personalized, or does it point a participant to one of a handful of model portfolios?

    Many managed accounts utilize as little as five model portfolios. The plan sponsor (or other fiduciary) should consider whether a risk tolerance questionnaire that points to one of the investment models (with no increased cost to the participant), potentially, could take the place of more expensive and complex technology.
     
  2. Will the managed account technology determine if the investment categories have shifted during the year and adjust automatically, or will the portfolio remain static? Will a fund be removed from the service if it goes from one category to another?

    Fund categories can be fluid. For instance, a large cap value fund could be recategorized as large cap blend. Many managed account services either completely ignore fund category shifts after the original allocation or remove plans from the service if a category shifts.
     
  3. How much interaction does the plan sponsor (or other fiduciary) want the plan advisor to have with the managed account service? 

    A true advisor managed account not only has the capability to incorporate an advisor’s selection of investments, but also the complete elimination of entire asset classes based on his/her own capital market assumptions.
     
  4. Is the cost appropriate for the service?

    Is the fee as little as five to 10 basis points or is it 35 to 75 basis points? This could be a major determining factor.

Why are managed accounts different?

Because managed accounts have a higher degree of personalization than, for example, a TDF, they can potentially lead to more successful retirement outcomes. A managed account approach provides participants with a professionally guided, goal-based investment strategy in a manner akin to defined benefit plan investment approaches.

Under the managed account model, investment managers use multiple factors to determine the appropriate investment approach for meeting the retirement income goals of a participant. Using participant data, a managed account model creates the investment approach best suited to optimize successful retirement outcomes for the individual.

Common factors include:

  • Current age
  • Planned retirement date
  • Spouse or other dependents and their ages
  • Retirement income goals
  • Pensions
  • Other retirement assets
  • Other assets available to support a retirement income plan
  • Current contribution levels

Morningstar produces an annual study on the impact of managed accounts on participant investing and savings7. In its 2022 analysis, Morningstar found that for participants who were considered “off-track” for retirement (i.e., they had projected retirement income of less than 70 percent of their salary), retirement savings, investing and income levels improved when using a managed account option.

Participants utilizing managed accounts demonstrated the following changes in retirement savings behaviors,

  • 72 percent increased their savings rates;8
  • The median deferral rate increased by 33 percent9; and
  • More off-track participants began maximizing their employer match.10

The effects on investing in managed accounts included the potential for11

  • More-efficient portfolios
  • More-appropriate portfolios based on participant risk levels
  • Higher Quality funds
  • Improved future hypothetical one-year performance

As a result of the combined impact of improved savings and investing, managed accounts participants experienced the potential for12

  • More wealth at retirement (even after considering fees) and
  • More retirement income

With the combined impact of improved saving and investment decisions, managed accounts have appeared to create better retirement income outcomes for individuals who used them. Based on the information gathered in the study13, hypothetically, an average, 30-year-old participant could have nearly 39 percent more retirement income using a managed account service. Therefore, according to the findings, managed accounts can have a positive impact on a participant’s retirement income outcome, if appropriate.

Is a managed account service right for a plan?

It depends. Managed accounts should align with the overall goals of the plan. If increasing savings, improving investing, and providing more wealth at retirement are goals of a retirement plan, then a managed account offering could be a good fit.

In a 2021 Cerulli14 Report, the top reason plan sponsors gave for implementing a managed account was to help with participants’ retirement income goals. That begs the question—does the plan support a retirement income philosophy? Or, put another way, does the plan support a “to retirement” or “through retirement” philosophy?

If a managed account offering makes sense for a plan, is there language in the Investment Policy Statement (IPS) regarding managed account services?

The IPS should address whether a managed account option is permissible for the plan, and how plan officials select and monitor such an arrangement. If the IPS does not contain such information, plan officials should add language to the document to address the issues, as well as what considerations and benchmarks the plan will use to evaluate managed accounts.

How does a plan sponsor pick a managed account provider?

Not all managed account providers are the same. Even though they offer the same basic service (i.e., personalized investment management of a DC plan participant’s account based on generally accepted industry methodologies), managed account providers vary on how they deliver that basic service. Providers use different investment options, employ varying strategies to develop and adjust asset allocations for participants, incorporate varying types and amounts of participant information, and rebalance participant accounts at different intervals. As a result, participants with similar characteristics in different managed account arrangements are likely to have differing experiences. Plan sponsors without expertise in the assessment of these variables should seek professional support when selecting a managed account provider.

Some key differences between managed account providers include, but are not limited to,

  • The fees are charged and the ways costs may be offset
  • Investment options that are available to be used—existing plan investment options only or ability to use off-menu options
  • Asset allocation strategies
  • Type, amount, and methodology for gathering participant information
  • Rebalancing approaches and time frames
  • Clarity of fiduciary role
  • Level of computerized (i.e, "robo") information used
  • Types of other available services

Then, with respect to the managed account provider and the plan, some considerations include

  • What is the plan trying to achieve by adding a managed account?
  • Who will be able to access the managed account?
  • Will the managed account be a QDIA?
  • Do the services provided by the managed account come at a reasonable cost?
  • What is the reputation of the provider and quality level of its offering?
  • What investments are used?
  • Does the managed account fit the needs of the plan participants?
  • What level of personalization is permitted?
  • Does the provider offer participant education?

How do plan officials monitor the managed account provider and measure performance?

Remember, managed accounts are a service—not an investment option. Consequently, traditional benchmarking methodologies for a single fund, such as how the fund performed historically against a benchmark and/or peer, do not fit the bill and miss the mark. The lack of accepted performance metrics for managed accounts is evident and cries out for attention15. According to a 2021 Callan study, 71 percent of respondents that offered managed account services16 did not benchmark the outcomes of the services. Plan sponsors clearly need a governance process and guidance from savvy financial professionals in this area.

While a comprehensive discussion of managed account performance measurement is beyond the scope of this article, the considerations should at least include success at producing the desired personalized participant outcomes that is the account’s proposed differentiator and hallmark.

 

Conclusion

Offering managed account options in DC plans is a growing trend, primarily because of their personalized retirement outcome orientation. Whether to include managed account services within a DC plan is a fiduciary decision for plan sponsors and committees that should match the goals of the plan, and not be taken lightly. Plan officials must govern their plans in a prudent manner that is in the best interest of plan participants, while being mindful of fees. If a managed account service is appropriate for a plan, the governance elements include selecting, monitoring, benchmarking and documenting all stages of the decision and maintenance process. The industry lacks an accepted framework to confidently meet these expectations. Financial advisors have a true opportunity to offer consultative value in this new frontier.

 

Related Insight

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Retirement savers, whether they are just starting out in the workforce or approaching retirement, need access to differentiated investment options to help them accumulate, grow and protect wealth assets.

  1. GAO, Improvements Can Be Made to Better Protect Participants in Managed Accounts, June 2014

  2. The Cerulli Report, U.S. Retirement Markets 2021, Solidifying Relationships with Plan Sponsors and Participants

  3. Ibid.

  4. Ibid.

  5. Pensions & Investments and Cerulli Associates, April 2020

  6. GAO, Improvements Can Be Made to Better Protect Participants in Managed Accounts, June 2014

  7. Morningstar, The Impact of Managed Accounts on Participant Savings and Investment Decisions, March 2022

  8. Ibid.

  9. Ibid.

  10. Ibid.

  11. Ibid.

  12. Morningstar, The Impact of Managed Accounts on Participant Savings and Investment Decisions, March 2022

  13. Ibid.

  14. Cerulli, U.S. Managed Accounts, 2021

  15. Source: Planadviser, Measuring Managed Account Performance Is Part Art, Part Science, March 2018.

  16. Source: Callan, DC Plans Continue Laser-Focus on Fees, Exclusive Callan Survey Finds, March 2022.

A defined contribution plan is a type of retirement plan in which the employer, employee or both make contributions on a regular basis.

A 401(k) QDIA (Qualified Default Investment Alternative) is the investment used when an employee contributes to the plan without having specified how the money should be invested.

A target-date fund (TDF) is a fund offered by an investment company that seeks to grow assets over a specified period of time for a targeted goal. While target-date funds aim to reduce risk overtime, they—like any investment—are not risk free, even when the target date has reached. Target-date funds do not provide guaranteed income in retirement and can lose money if the stocks and bonds owned by the fund drop in value.

This material is for informational purposes only and is not to be construed as specific tax, legal, or investment advice. You are strongly encouraged to consult with your independent financial professional, lawyer, accountant or other advisors as to investment, legal, tax and related matters.

The opinions expressed are not necessarily those of the firm. These materials are provided for informational purpose only. These opinions are not intended to be a forecast of future events, a guarantee of future results, or investment advice. Any statistic contained herein have been obtained from sources believed to be reliable, but the accuracy of this information cannot be guaranteed. The views expressed herein may change at any time subsequent to the date of issue hereof. The information provided is not to be construed as a recommendation or an offer to buy or sell or the solicitation of an offer to buy or sell any fund or security.

This material is for informational purposes only and is not to be construed as specific tax, legal, or investment advice. You are strongly encouraged to consult with your independent financial professional, lawyer, accountant or other advisors as to investment, legal, tax and related matters.

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All investments involve the risk of loss of principal.

Past performance is no guarantee of future results.

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