Managed Accounts Are Particularly Beneficial for Near-Retirees

Experts now view two problems that have historically hurt managed accounts—high costs and participants’ failure to input data to personalize them—as issues that are potentially in the rearview mirror.

They say most managed accounts now cost only 40 basis points (bps) more than target-date funds (TDFs), and that by combining digital tools with robo advisers and access to human advisers, they are starting to see many participants invested in managed accounts become more engaged. In fact, many see a time when some plans might use managed accounts as the qualified default investment alternative (QDIA), particularly for those 50 or older.

Managed accounts are particularly beneficial for those nearing retirement, says Tina Wilson, senior vice president and chief product officer at Empower.

“The reason managed accounts are so effective as you approach retirement is, in those 15 years prior to retirement, your investment allocation provides so much more impact than your savings rate,” Wilson says. “Managed accounts provide so much more help because they are personalized and take into consideration factors beyond age, which is the static consideration of target-date funds. They will look at your time horizon before retiring; other assets you may hold, including your household’s income; Social Security; and they allow you to adjust your retirement date and savings need to truly provide a customized approach. For those people approaching retirement, this can provide a significantly improved outcome.”

Wilson says Empower’s research has found that those who are truly engaged with their managed accounts can expect 16% more income in retirement than someone in a TDF. For a retiree earning $50,000 a year before retirement, that can mean an additional $8,000 a year in retirement and $200,000 over the life of a 25-year retirement, she added.

While Vanguard recommends managed accounts to people of all ages, the asset manager and recordkeeper believes they are the most effective for those approaching retirement because near-retirees have higher balances and more complex financial needs, says Amber Czonstka, head of institutional investor advice and client experience at Vanguard.

“Managed accounts can help people estimate their health care costs in retirement, think through a Social Security strategy, develop a draw-down strategy that will give them access to their funds in the most tax-efficient way and develop a plan to leave a legacy, if that is one of their goals,” Czonstka says. “Managed accounts can help them navigate all those complex issues.”

She says most of Vanguard’s plan sponsor clients want to use a TDF as the QDIA and put a managed account as an option in the investment menu. However, she says, if it’s offered this way, only a handful of participants are likely to invest in the managed account.

Czonstka says she believes a better way for sponsors to offer managed accounts is through a hybrid QDIA, whereby younger investors are defaulted into a TDF and those, say, 50 and older are put into a managed account paired with advice. “In a study of 3,000 investors that we conducted, we found that 90% of those investors who work with an adviser make meaningful changes to their portfolio, and 80% are on track for a successful retirement. This gives people portfolio, financial and emotional value.”

Vanguard offers advice in a variety of ways with its managed accounts, she says. “We offer situational advice, whereby a participant can work with our advisers to navigate a major life event,” Czonstka says. “We also offer digital advice, which is pure robo advice, offered for a mere 15 basis points. This is designed for earlier stage participants who want advice but also to have a sense of empowerment over their account. Finally, we offer financial advice for 30 basis points for those who want high-touch advice, paired with robo advice. This is a hybrid of the other two.”

Czonstka says that with a growing number of sponsors looking to keep retirees in their plan in order to benefit from cost efficiencies, she thinks more of these sponsors will embrace managed accounts paired with a robust set of financial wellness tools for this population.

However, David Blanchett, head of retirement research at Morningstar, notes that most plan sponsors still aren’t offering managed accounts. “Only about 50% of retirement plans currently offer managed accounts,” he says. “I would like to see that figure reach 80%. I would also like to see more sponsors utilize managed accounts as the default investment. That hasn’t gained a lot of traction, so I think the way to start down this path is with a hybrid QDIA.”

As to how sponsors can go about selecting a managed account, “most recordkeepers have a managed account solution available,” says Stan Milovancev, executive vice president at CBIZ Retirement Plan Services. “A plan sponsor can work with their recordkeeper or adviser to review the options and select the appropriate managed account option for their plan. Once the option is available, the plan sponsor will be responsible for working with their service providers to make sure participants are properly educated and informed of the option.”

A second option, which Milovancev says he believes is preferable, is to go with an adviser-managed account option, “which is an evolution of managed accounts and, arguably, the future,” he says. “Adviser-managed accounts add in an independent investment adviser as a fiduciary to the participants. For instance, CBIZ Investment Advisory Solutions, in conjunction with Morningstar, is able to provide adviser-managed accounts.”