Cerulli Foresees Increased Use of Managed Accounts in DC Plans

Several trends in the defined contribution (DC) retirement plan market are likely to propel a greater interest in managed accounts, Cerulli Associates says in The Cerulli Edge―U.S. Retirement Edition, 1Q 2019 issue.

“Growing emphasis on financial wellness, concerns about lack of retirement income options within employer-sponsored plans, increasing customization for the participant, and fiduciary concerns could spur additional growth in managed accounts,” Cerulli contends.

According to Cerulli, the managed account category within DC plans experienced robust growth in recent years, with total assets more than doubling from $108 billion in 2012 to $271 billion in 2017. DC managed account assets include those in which the managed account solution is a plan’s designated qualified default investment alternative (QDIA), and where it is offered as an option on the plan menu. Target-date funds (TDFS) capture the majority of QDIA flows, and Cerulli does not expect this dynamic to change during the next several years. Rather, Cerulli believes managed accounts will continue to gather assets as a customized solution for a targeted cohort of a plan’s overall participant population.

Cerulli estimates there are nearly 20.8 million households ages 45 to 69 with between $100,000 and $2 million in investable assets. For this cohort, close to 60% of their investable assets are in retirement savings. This segment captures what Cerulli considers to be the most relevant cohort of investors for a managed account program. As participants age or achieve greater account balances, their tolerance skews toward protecting accumulated assets, which may require greater customization than that of a TDF.

With the corporate DC market in negative net flows, some plan sponsors and intermediaries seek investment solutions that can better position the workplace savings plan as a decumulation vehicle, Cerulli notes. For plan sponsors that seek to retain the assets of retired/separated participants, there must be an in-plan retirement income solution available. As one of the largest managed account providers notes, “Plan sponsors are looking for an end-to-end, solution for participants,” or, a single portfolio solution that can guide them through accumulation and decumulation. Managed account programs typically have an advice component that becomes crucial in decumulation. Given the increased complexity of the decumulation stage, participants can benefit from access to advice, and this access is an important part of managed accounts’ value proposition. Data from a 2018 Cerulli survey of 800 401(k) plan sponsors shows that nearly 40% of plans that currently offer managed accounts do so because they “help participants with retirement income.”

In addition, Cerulli says the increasing interest among 401(k) plan sponsors in encouraging and promoting financial wellness aligns with the more individualized and holistic mandate of a managed account. Financial wellness emphasizes holistic advice and goes beyond a participant’s workplace retirement savings account, and one of the primary benefits of a managed account solution is its ability to reflect a more comprehensive and customized view of an individual’s financial picture and consider non-retirement assets.

Considerations for managed accounts

The largest managed account providers act in a fiduciary capacity regarding the managed account; however, Cerulli warns, one should not assume that all managed account providers take on the role of an Employee Retirement Income Security Act (ERISA) 3(38) fiduciary. “This is particularly important to remember when reviewing some of the newer hybrid target-date/managed account products that have been brought to market,” Cerulli says. It reminds plan sponsors that they retain the duty to monitor the managed account provider.

In addition, 401(k) plan sponsors are keenly aware of cost and can hesitate to offer participants what appears to be an expensive option relative to other investments. Cerulli reminds plan sponsors that ERISA urges plan fiduciaries to assess fees in terms of the value of the services provided. From this perspective, it can be argued that while managed accounts are generally more expensive when solely comparing fees, they provide additional services for participants, and, therefore, could offer greater value for the fee.

More information about this topic can be found in The Cerulli Edge―U.S. Retirement Edition, 1Q 2019 issue, which may be ordered from here.