Beyond Auto-Enrollment: Managed Accounts and Advice

Steve Dorval points to a classic scenario. “Someone would go to an employee education meeting and train everyone about the different features of a plan, and how to log into the website, and he’d teach them what a stock and a bond are and all the traditional education. At the end of the meeting, there’d be a line of people coming up to our educator, saying, ‘That’s awesome; thanks for the presentation. Tell me what do I do?’”

The reason was clear, says Dorval, vice president wealth solutions for John Hancock Retirement Plan Services. “They’re overwhelmed; they’re not interested; they don’t have a facility for it,” he says.

The retirement planning industry, for years, pondered how to bridge that gap—to transform nominal participants into committed investors and savers—“and do so in a way that’s legal, appropriate, allowed and understandable to the participant,” he says. The first steps are getting participants into the plan and encouraging them to save at appropriate levels. 

The search for better investment options produced balanced funds, along with target-risk and the increasingly popular target-date funds (TDFs), Dorval says. “The logical next steps along that continuum have been more personalized advice offerings, and that would include managed accounts.”

These combined strategies, while not for all, will help some employees increase retirement readiness. “The rising utilization of these professionally managed allocations is improving portfolio diversification construction for participants,” says Jean Young, director of research for Vanguard, “and we’re seeing improved portfolios overall.”

A managed account is a collection of funds, chosen by a professional asset manager, to address a participant’s specific investment goals and over which the manager retains discretionary control. To sign up for such an account, the participant supplies information about himself, including marital status, risk tolerance and a list of asset holdings outside the plan. Plan sponsors may also feed participant information to providers to enable a more personalized experience.

The provider then prepares a recommendation in the form of an asset allocation, showing the participant how, based on his circumstances, it would optimize his account. For the customization and advice, participants pay a higher fee.

“Some people sign up for it because they really want someone else to do it,” Young says. “They don’t like the idea of holding just one thing—they think they’re better off with a few. What we do see in the data is that the people who hold managed accounts, who choose to pay for that advice, tend to have larger account balances than [holders of TDFs].”

Even considering extra cost, advice is in demand, Dorval says. “However it gets delivered, we’re seeing more interest and demand from plan sponsors than we ever have,” he says.  “I’ve seen increases in general of both the adoption of our managed account product and the education meetings that are done,” Dorval says. For John Hancock, those meetings are actually 30- to 40-minute sessions in which its representative walks a participant through use of an account management tool.

To avoid conflicts of interest, a firm has an independent third party—in Hancock’s case, Morningstar—supply the tool, which supplies the advice. The rep “functions almost as a concierge,” Dorval says, helping the participant understand the advice, showing him how to implement it, with the click of a button, at the close of the session. Participants may check back with the representative, or perhaps a call center, for further guidance about the account.

“Since 2012, when we look at the percentage of the meetings we do, every year, we’ve seen a 10-fold increase, from 3% of the days being one-on-one days in 2012 to more than 30% being one-on-one days this year,” he says.

In contrast, he says, many providers have been offering tools such as online advice calculators for years, but they rarely get used. “So the question I’d ask a provider is: ‘How are you going to create engagement around the tools?’”

As Dorval indicated above, education alone is not enough. Young echoes his experience. “We tried the education front. Unfortunately, people don’t have the engagement or the interest,” she says.

Offering managed accounts has proved to be a good alternative for Vanguard, relieving participants of the need to master the skill of investing, yet allowing them to dabble a bit, vicariously, if they choose. According to Young, at the end of last year, 45% of Vanguard participants were fully invested in professionally managed allocations.

“This is huge because this means they’re not making portfolio construction errors; they’re utilizing an option that an investment professional is managing and rebalancing for them, be it a traditional balanced fund or a target-date fund,” she says. “But, that investment has been vetted by the more sophisticated plan sponsor fiduciary. Of course, every fund in the lineup has also been vetted by the sophisticated plan sponsor fiduciary.”

At John Hancock, average participant utilization of managed accounts on its platform has grown from 9.6% to 11.3% in the past two years. “The interesting thing is it ranges within plans,” Dorval says. “We have one plan where 53% of participants are using the [accounts], and many plans in which 15% are using them, but the plans that have low utilization pull down the average.”

At the company that has 53% participant utilization of managed accounts, the CEO serves as an advocate for managed accounts. “Every quarter, as part of their town halls, he reminds people about the product and says, ‘This is something I use and you should all think about using.’ It’s become part of the culture.” It’s in situations like this, where the plan sponsor encourages “tak[ing] a look at the product, understand[ing] it and creat[ing] the perception of value, that we see a much higher level of adoption,” Dorval says.

Some reasons a sponsor might want to champion managed accounts? While Dorval admits to “limitations on our ability to calculate the performance comparison” between, say, managed accounts and TDFs, “with folks who use managed accounts, we see 22% higher savings rates, and when Morningstar has done its numbers and looked at managed accounts across its platform, it sees about 87% of its participants increase their savings rate,” he says. Additionally, the accounts greatly diversify asset holdings—a security measure—and, at least some of them, give lower- to middle-income investors, the most common investor in these accounts, “access to true institutional-quality [products],” Dorval says.

These benefits, again, come at a price. For John Hancock’s managed account service, for example, fees are on a tiered schedule, with the average at around 38 bps,” Dorval says. Vanguard’s are also scaled, the greatest being 40 bps.

“You need to believe, as a fiduciary, that there’s value for those additional fees,” Dorval says. “You can often get into the question of ‘what’s the right comparison?’” He notes that his company’s fees are less than those of some retail investment management services and level with those of some robo-advisers. “If the comparison is TDFs, it might look more expensive, but there’s greater level of customization at the individual level.”

Young, though, defends target-date funds as “an elegant and solid solution” and says to keep in mind what extra fees will do: “You’re imposing an additional cost, which means you’re reducing the returns to the participant,” she says. Also remember who these accounts are for: investors with more atypical—“more complicated”—circumstances.

“It’s perfectly appropriate to have it as a default—it’s one of the allowed QDIAs [qualified default investment alternatives],” she says. “But those are the kinds of factors you’d be taking into account when [making] that kind of choice.”