How and When to Encourage Use of Managed Accounts

Many defined contribution (DC) retirement plans default participants into a target-date fund (TDF), but also offer managed accounts—financial planning solutions based on a participant’s personal financial situation utilizing an investment management approach.

 

While some participants may choose to invest in a managed account, there may be others who don’t choose to do so that would benefit from investing in one.

 

Many in the industry are proposing managed accounts as a qualified default investment alternative (QDIA), says Jodi Epstein, partner with Ivins, Phillips & Barker, Chartered in Washington D.C., “But having a managed account as the QDIA means participants are not actively choosing it and providing more information about themselves, which would tailor the underlying investment selections to their specific circumstances. I have a difficult time seeing how fiduciaries can justify the cost of a managed account compared to, for instance, a target-date fund.”

 

The concept of a hybrid QDIA—one that initially defaults participants into a TDF then moves them to a managed account at a certain point, for example, an age nearing retirement—is gaining attention in the retirement plan industry. But, deciding when and how to move participants automatically from one product to another leaves Epstein with fiduciary concerns.

 

Epstein says, “If I had a committee interested in a hybrid QDIA, I would have them document how flipping a non-engaged 50-year old from a TDF at 15 basis points to a managed account at 45 basis points is prudent. The participant can opt out, but because this is the default option, they are by definition not engaged so they probably won’t opt out, and the managed account is twice as expensive and may or may not give them an advantage.”

 

Managed accounts are the default for 4% of DC plans, according to a 2018 Callan report, and the availability of managed accounts has steadily increased over the last decade, up from 6% of plans in 2005 to 55% of plans in 2017.

 

The data available about participants has increased exponentially from 2007 compared to today. According to a white paper from Morningstar Investment Management LLC, “The Impact of Managed Accounts on Participant Savings and Investment Decisions,” in 2007, most recordkeepers knew a participants age and plan balance—some recordkeepers also knew four other data points which included salary, savings rate, employer match and employer tiered match.

 

By 2017, most recordkeepers knew seven additional data points including salary, savings rate, brokerage account investments, location, loans, employer match and employer tiered match—some recordkeepers also know a participants retirement age, pension, gender and outside assets.  

 

Managed accounts as an opt-in investment

 

“Managed account adoption as an opt-in varies greatly from low single digits to 40%”, says David Blanchett, head of Retirement Research at Morningstar Investment Management, LLC. “The difference is based on plan sponsor support and how the managed account is integrated into promotion materials and on recordkeeper platforms.”

 

According to Mike Volo, senior partner, Cammack Retirement Group in Wellesley, Massachusetts, “The price of managed accounts has been driven down. They are typically 30 to 40 basis points on average which compared to, for example, a retail managed account at 1% of assets, on a relative basis is quite appealing.”

 

Managed accounts have been around for 40 years but they were slow to pick up momentum until the QDIA rules changed and they became a potential default. Volo says, “I’m still seeing the vast majority of plans using managed accounts as an opt-in solution. Adoption is usually in the single digits because participants are often not aware that the managed accounts are available.”

 

Encouraging managed account use

 

The big question is how and when to educate and encourage DC plan participants to engage with a managed account. “It all comes down to targeted communications,” Volo says. “The adviser working with the plan sponsor and the recordkeeper can outline a communication strategy to target the participants for which a managed account may be a good solution. Whether it’s based upon age, account balance or likely a combination of both, participants can receive targeted communications making them aware of the offering, explaining what it is, and that may increase adoption.”

 

Lorianne Pannozzo, senior VP, workplace planning and advice in Fidelity’s Boston office agrees that targeted communications have the most impact. “It’s a matter of who you send the value proposition to and let them actively opt-in to it.”

 

There is a very clear value proposition for a managed account—it’s personalized and suits those with more complex financial needs, Pannozzo says. “At Fidelity we have support tools to help a person decide whether or not they can invest their assets themselves or if they are a target-date fund or managed account type of investor. But in most instances, you are sending targeted communications and allowing the participant to decide for themselves what is right for them.”

 

From a plan sponsor fiduciary perspective, Epstein says it is much less risky telling participants a managed account is available rather than defaulting them into one. She would suggest to clients that they use verbiage such as “you may want to consider” or “you may want to learn more about this option and here’s how to do that.”

 

“If it’s available as an option, you certainly want people to know it’s there. And it’s fine to explain who it may be appropriate for—at what age or level of assets in the plan and out of the plan,” Epstein says.

 

Nathan Voris, managing director, strategy, at Schwab retirement services in Richfield, Ohio says, “It’s easy to talk about the pre-retiree and managed accounts because it’s more tangible. But if you look at the math there’s a lot of value for younger folks as well.”

 

He says there are advantages for the average Millennial to enroll in a managed account—the personalization, the savings effects that comes along with a managed solution plus participants tend to be stickier through periods of volatility.

 

Volo says, “It’s all about creating awareness—highlighting the benefits and features of a managed account. I do think for participants who have more complex needs, larger balances and outside assets, the features and benefits of managed accounts will encourage them to seriously consider one as an option.”