New Developments in Managed Accounts

Managed accounts have evolved a lot over the past several years, with decreasing fees and increasing levels of advice. Now may be a good time for defined contribution (DC) plan sponsors to reassess whether to include them within their employer-sponsored retirement plans.

“We’ve seen tremendous growth in the use of managed accounts in defined contribution plans over the past few years,” says Amber Czonstka, head of product advice and client experience for Vanguard’s institutional business. “Over 70% of participants in Vanguard recordkept plans have access to a managed account.”

Vanguard defines managed accounts as fee-based advisory services that provide participants with personalized recommendations, advice and portfolio management tailored to their unique needs. In a non-discretionary managed account, the investment advisor requires participant permission before transacting on the account. In a discretionary managed account, the participant provides the adviser to transact on their behalf.

Vanguard’s access figure includes the Vanguard Managed Account Program (a 3(38) service), Digital Advisor (Vanguard serves as a 3(38) discretionary manager) and Personal Advisor Services, which is a non-discretionary managed account.

The reasons for the increased interest: “Price and accessibility, and the robustness we’re able to bring when it comes to advice,” she says. “Advice is no longer just portfolio management, but it’s a range of financial planning solutions—to help think through debt management strategies, save for an emergency fund and think of how to draw down retirement funds in a tax-optimized way.”

Charles Schwab’s managed account availability numbers are also high – 71% of its plans offer managed accounts to participants. “Our standard offering is a combination of point-in-time advice and full discretionary managed accounts,” says Nathan Voris director of investments, insights and consultant services for Schwab Retirement Plan Services in Richfield, Ohio.

Managed accounts provide personalized investment recommendations for a participant based on known data from that either recordkeepers and sponsors know about them, with the potential to add additional information when the participant engages. “The optimization tools and the investment capabilities has really evolved and improved because of the data that is available,” says Voris.

Meanwhile, the fees for managed accounts have been decreasing. “There has been rising interest in managed accounts, and there’s definitely been a reduction in fees for the service over time,” says David Blanchett, head of retirement research for PGIM DC Solutions. “I think that interest will continue and likely accelerate, especially as more plans become interested in providing advice for plan participants.” Average fees for a typical managed account are now about 0.35% to 0.40%, down from more than 0.60% several years ago, he says.

More Targeted Advice

Rather than just providing a portfolio based on more personalized information than a target-date fund (TDF) has, managed accounts are now offering several levels of advice to meet different participants’ needs.

“According to our annual ‘Retirement Saving and Spending’ survey, 71% of participants want help or advice on saving for retirement through their current workplace,” says Lee Stevens, head of institutional sales at T. Rowe Price. “The personalization of advice can be meaningful, especially for participants with more complex financial situations.”

Some managed accounts now are providing guidance on optimal decumulation strategies, Social Security claiming and, sometimes, outside assets, Blanchett says. “They’re providing more holistic guidance than earlier versions of the service,” he explains.

The way the advice is provided can also vary depending on how much the participant wants to engage with the plan. Vanguard, for example, offers several levels of advice.

“Our managed account fee structure varies based on the service,” says Czonstka. Digital Advisor, with an advisory fee of 0.15%, is designed for investors seeking advice through an all-digital platform. Personal Advisor Services, with an advisory fee of 0.30%, complements a high-tech digital experience with advice from a Vanguard Personal Advisor.

The Vanguard Managed Account Program (VMAP), powered by Edelman Financial Engines, offers a personalized retirement plan with an investment strategy and ongoing professional management with a retirement income feature. VMAP fees are based on account assets managed. The firm also offers Vanguard Situational Advice, which provides a one-time, adviser-led consultation to help with particular life events, such as a financial windfall, marriage, expanding family or job change. The one-time fee can vary if the plan subsidizes all or part of the fee for participants, Czonstka says.

Younger participants who are trying to figure out how to juggle multiple financial priorities might want a digital interaction, but as their needs become more complex—for example, as they’re trying to estimate health care costs in retirement—they may want to choose to engage an adviser, Czonstka says. “We believe that advice is a constantly evolving product,” she notes.

Schwab also offers several levels of advice in its managed accounts.

“If you want to come in and use a digital tool and get investment and savings recommendations on your own, you can do that through the advice managed account program digitally,” says Voris. “You can also have a conversation with a financial coach that can go into any direction that the need arises—financial planning, estate planning, etc. It depends on what the individual wants to get out of it.

“Most of the time, the plan sponsor chooses the full suite of services for managed accounts, and it’s up to the individual participant to decide how they’d like to engage,” he continues. “It really is a gateway to engagement—a person goes in and has that digital exchange and then the door opens to explore all the other goals and objectives they might have.”

The participant starts by providing information through a digital tool or by talking with a financial coach, then Schwab uses Morningstar tools to recommend the savings rate and investment portfolio. The participant then decides how to implement the guidance—choosing either a point-in-time solution or deciding that they want to adopt a discretionary solution with ongoing management. “The solutions are presented side by side and they can see the dollar amounts,” says Voris. “We are putting that decision in the participants’ hands.”

The newest development is adviser managed accounts. “It’s very similar to what you would have with traditional managed accounts, except the plan adviser serves the role in the portfolio construction and engages with the participant,” says Voris.

The plan adviser takes on the fiduciary role and often knows the plan sponsor and its culture and how to engage at the participant level. “This is new, but if you ask me the No. 1 trend, I think a big portion of the managed account growth will be in the adviser managed account space,” he says.

Managed Accounts as a Dynamic Default

In the past, some plans would offer either TDFs or managed accounts. Now, more plans are offering both options to meet different needs through a participant’s life stages.

“I’m a big fan of target-date funds, and they have dramatically improved investment outcomes for participants in defined contribution plans,” Blanchett says. “But target-date funds are basically just based on your age.” Managed accounts can factor in other criteria to determine the risk for your portfolio, such as income, account balance, savings rate and outside assets, in addition to age. “It allows for a more personalized portfolio,” he says.

Younger participants who want a low-cost solution without a lot of engagement may only want a TDF. “You don’t see as many risk-level differences when people are younger, but they widen the older someone gets,” Blanchett says. Managed accounts, on the other hand, cost more but provide more personalized portfolios and advice.

“We believe that target-date funds and managed accounts exist in harmony,” Czonstka says. “Target-date funds are an elegant solution when [participants are] not engaging with us and sharing information about themselves. As the participant is willing to share more about their financial picture—their holdings outside of the financial plan, the struggles they’re dealing with—then we can tailor the portfolio and glide path to the participant’s needs.”

Some plans are starting to offer managed accounts as the default investment for older plan participants.

“There is growing awareness of dynamic qualified default investment alternatives [QDIAs], which merge two QDIAs: a target-retirement date or balanced investment option and a managed account service,” says Stevens. Rather than having a TDF as the default for all ages, which many plans do now, the default may be the TDF for younger participants, but then it might become the managed account for participants age 50 or older.

“Older plan participants who have higher account balances and more outside holdings tend to benefit most from managed accounts,” Stevens says. “Younger participants with less complex financial situations are well-served by target date funds.”

More Advice for Retirees

Managed accounts are also expanding to provide more advice to participants after retirement, which continues to keep them engaged in the plan even after they leave their employer.

“Retirement income is a hot topic right now, and advice in managed accounts is a great place to help solve for income and help people achieve those goals from a decumulation and retirement income perspective,” Voris says. “The decumulation and withdrawal strategy is a very personal conversation. When a person reaches that point in their career, they often seek out advice.”

Blanchett says one way plan sponsors can keep participants engaged with the plan even after they retire is by providing an extra level of advice to help them manage their money after they stop working. “It’s not only how risky the portfolio should be, it’s also how much you should spend, what accounts to draw down first and guidance for assets that aren’t in the managed account,” he says.