Managed Accounts Provide Personalized Investments but Some Sponsors Hesitant to Offer

Updated with correction.

Plan sponsors that want to offer participants a managed-account investment option must evaluate these programs in a “holistic, comprehensive manner” that assesses the potential qualitative benefits of a program’s guidance and advice-based services, as well as the more quantitative investment benefits, new research from Cerulli Associates and Edelman Financial Engines found.

While target-date funds have been integral in helping less-engaged plan participants save for retirement, the Cerulli report argued that these investments are limited and that managed accounts provide more personalization for diverse employee populations, especially as they near retirement age.

Plan sponsors are interested in more personalized solutions to help improve participants’ retirement readiness, but they face roadblocks when considering managed accounts—namely, fear of litigation, concerns about high fees and a lack of engagement.

Cerulli’s new report, “The Benefits of Personalization in Defined Contribution Plans,” issued with support from Edelman Financial Engines, stated that most DC participants have limited access to high-quality, cost-effective investment and financial planning advice outside of their plans and instead rely on in-plan financial planning, financial wellness or managed accounts for retirement planning and advice.

Edelman Financial Engines is, notably, one of the largest managed account provider in 401(k) plans in the U.S.

The Plan Sponsor Council of America reported that 48.8% of plans offered managed accounts in 2022, compared with 36.3% in 2019, indicating that uptake of this investment strategy is becoming more popular.

Cerulli survey data revealed that plan sponsors most often cite financial planning features and retirement income planning as the most important reason for offering managed accounts, but some plan sponsors also cite the importance of offering managed accounts to maintain benefits offerings competitive with industry peers, Cerulli found.

The report argued that investors benefit from in-plan managed accounts for the following reasons:

1. In-plan programs are considerably less expensive than advice solutions participants could access outside of their DC plans;
2. Managed account providers are beholden to ERISA and are subject to a “rigorous due diligence process” from the plan sponsor and consultant; and
3. Participants will generally have access to less expensive underlying funds within their DC plan.

“Managed accounts are a means through which plan sponsors can offer personalization to their plan’s participants,” said Shawn O’Brien, director of retirement at Cerulli, in an email response. “Plan participant populations are diverse, and as plan sponsors seek to offer a comprehensive retirement offering, managed accounts fill in the gaps left by other one-size-fits all solutions, like target-date funds.”

O’Brien added that some participants, particularly those who are more affluent or nearing the decumulation phase, seek the more personalized investing experience that managed accounts can provide.

Argument Against Managed Accounts

However, Cerulli found that many plan sponsors that do not offer managed accounts either do not subscribe to the concept from a cost-benefit standpoint, offer participants financial advice or guidance in another capacity, or are considering offering a managed account.

When compared with other defined contribution investment structures, there are potential drawbacks to managed accounts sponsors may consider. For example, managed account managers tend to charge a fee on top of the typical investment fees of the individual fund options in a retirement plan. 

The Cerulli report shared a quote from an unnamed vice president of corporate benefits at a financial services company, expressing concerns about the fees that managed accounts charge. 

“We’re not convinced that the fees charged by the managed account industry are worth the decisions that they’re making, since target-date funds—kind of by definition— are supposed to make all those decisions for you,” the vice president stated. “The managed account providers will, of course, say, ‘Well, not everyone is the same investor’ and, yes, that’s true. But so far, we have not found that the fees charged are worth what we’re asking them to do. That’s a subjective call, I totally get that.” 

As fiduciaries, plan sponsors are responsible for evaluating if the fees that participants pay from plan assets are both reasonable for their value, as well as compliant with ERISA. In this case, plan sponsors need to understand how fees are structured in managed accounts and decide how favorable or unfavorable a fee structure is based on the demographics of their participants.  

Given the risk of class-action litigation in the ERISA-covered DC sector, many plan sponsors are concerned about fees as they consider any in-plan investments, but Cerulli’s report argued that defaulting participants to the lowest-cost option does not necessarily protect employers from lawsuits.

“When evaluating whether or not to offer a managed account program, plan sponsors should look beyond investment returns and volatility to uncover the full value that these programs deliver to participants,” the report stated.

Driving participant engagement in managed accounts is also a challenge for plan sponsors. While managed account programs can extract several participant data points directly from recordkeeper platforms, they still require participants to provide additional information, such as assets held outside the plan or the assets of a spouse or partner, to further tailor their asset allocation and advice.

Consequently, additional participant engagement is necessary to make managed accounts truly personalized. One plan sponsor noted in Cerulli’s study that some participants are more passive in these accounts than others, and a significant number who enrolled in the managed account program do not provide any data and never interact with it.

Some plan sponsors are also hesitant to share additional participant information with their managed account provider due to cybersecurity concerns or fears of aggressive cross-selling, but others expressed willingness to do so under the right circumstances or with a trusted provider, according to Cerulli.

Managed Account Implementation Requires Holistic Approach

Managed accounts often bring together financial planning and custom portfolio management and offer more informed advice to participants.

However, plan sponsors need to be aware of potential conflicts of interest when evaluating providers, as some providers may use financial guidance and advice interactions as opportunities to cross-sell suboptimal products or services outside of their plan, according to Cerulli.

Cerulli recommended that plan sponsors proactively address any concerns with their current managed account provider or during the requests for proposal process to avoid conflicts of interest.