Managed Accounts Are Particularly Beneficial for Near-Retirees

With costs coming down and digital and robo-advice technology getting participants to share more personalized information, sources say managed accounts are poised to be adopted by more plan sponsors.

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.

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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.”

SURVEY SAYS: Is Your Summer Vacation Back ‘On’?

PLANSPONSOR NewsDash readers share whether they will be taking a summer vacation this year and whether it will be similar to pre-pandemic vacations.

Summer vacation plans were derailed for many Americans last year because of the COVID-19 pandemic, but it seems like a number of people feel comfortable taking a vacation even before the summer months this year.

Last week, I asked NewsDash readers, “Is your summer vacation back ‘on’ this year, and will it be the same as pre-pandemic vacations or will you be taking a stepped down vacation to be cautious?”

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Nearly three-quarters (73.3%) of responding readers work in a plan sponsor role. Ten percent are recordkeepers/TPAs/investment consultants; 6.7% are advisers/consultants; 6.7% are attorneys; and 3.3% are CPAs.

More than six in 10 responding readers (63.3%) said they will be taking a summer vacation this year, while 13.3% said they will not and nearly one-quarter (23.3%) said they don’t know.

Four in 10 (40.7%) indicated their summer vacation will be similar to pre-pandemic vacations, but 37% indicated they will be taking a stepped down vacation to be cautious. However, 7.4% reported that they will be stepping up their vacations to make up for the restrictions of the past year. The rest of respondents said they don’t know what their summer vacation will be like.

The majority of readers who left comments are looking forward to taking a vacation, with a couple saying it will be after vaccinations and others mentioning that they will be driving instead of flying. One reader said, “I now feel comfortable to move around the country, but won’t be going out of the U.S.” Some readers indicated their vacations were or will be stepped down because of places that are not or will not be open, and one reader shared how their switch in vacation destinations made things better. Editor’s Choice goes to the reader who said: “I cannot wait! Stuck inside, not going anywhere…when I’m ready, I’m taking a vacation…my mind and body (plus those I deal with daily) need a break! :)”

A big thank you to all who participated in the survey!

Verbatim

I’ve actually already taken my summer vacation – in March. And hoping for another in September. We went to Hawaii and it was perfect, got there ahead of the tourist rush. But it was sad to see how many of the places I loved to visit had closed shop (farewell, Holuakoa Cafe, what a wonderful place it was).

Won’t be flying, but driving which may be much nicer – but longer.

I am going to go crazy if I don’t get some time at the beach! With that being said, we are driving down, renting a condo, cooking most of our meals and bringing masks for when we go out. We can vacation, we just need to do it responsibly.

Bring it on baby – it’s time to get away!

Heading to the Caribbean to get away and then travel to see family that we haven’t seen in almost a year.

Too busy to plan a vacation to be away. Too many obligations locally.

We only missed one of our four vacations last year; looking forward to the remaining three this year!

I now feel comfortable to move around the country, but won’t be going out of the U.S.

We rent a large house and have around 30 people who stay for a week on the beach. We have missed it and looking forward to this summer when everyone will be vaccinated.

It will be stepped down, but not to be cautious, but because we’re not sure what’s back open yet and if it might be worth waiting another few months/year.

Not a fan of big cities or crowds. Last year, we started focusing on national wildlife refuges instead of national parks. Hardly anyone was out and about. Drive thru for meals and take them back to our room or cabin. Lots of wildlife around. Perfect for us!

I cannot wait! Stuck inside, not going anywhere…when I’m ready, I’m taking a vacation…my mind and body (plus those I deal with daily) need a break! 🙂

When I’m able to be fully vaccinated, I will be more comfortable resuming pre-COVID activities

Looking forward to a permanent vacation as I plan to retire! 🙂

I get the second vaccination shot next week. After that has time to take effect, I plan to get back to “normal” while being careful wherever I go.

???? It depends on quarantine restrictions in other countries.

I doubt we’ll take a vacation; the pandemic isn’t over yet.

Looking forward to traveling again

It will be stepped down, not because I’m being cautious, but due to the moving target that the federal government’s (current, but ever changing) read on the “science” and the restrictions they impose. But have a lot to make up for…

Traveling by car instead of plane.

 

NOTE: Responses reflect the opinions of individual readers and not necessarily the stance of Institutional Shareholder Services (ISS) or its affiliates.

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