A Custom Fit

With managed accounts, the more participant input, the better the allocation strategy

What is a managed account? The term has taken on multiple meanings depending on the context and provider, which can lead to confusion for plan sponsors trying to evaluate available solutions. “In general, any product that allocates participants to some collection of investments using a multi-factor risk assessment likely achieves some of the core benefits of managed accounts,” says Brian O’Keefe, director, research and surveys, at PLANSPONSOR. The term has evolved to not just cover an individualized account run by a third-party manager, but also some sort of asset allocation overlay on top of plan funds—often also referred to as a model portfolio.

The PLANSPONSOR Managed Account Buyer’s Guide, which was last published in 2015, uses a narrow definition of “managed account,” concentrating on providers of the technology-driven products that run on participant-level accounts. These three points carve out our definition:

1) Managed accounts offer asset allocation, and other ancillary services, at the participant account level. From our perspective, investment vehicles whereby a third party manages a pool of assets at the plan level, which participants can then invest in as they would in a mutual fund, are not managed accounts in this context.

2) Managed accounts should be acceptable as a qualified default investment alternative (QDIA) per Department of Labor (DOL) guidelines. If the product or solution is not an eligible QDIA, we are not considering it a managed account. Some solutions have been specifically designed for non-Employee Retirement Income Security Act (ERISA) 403(b) plans, but, for most defined contribution (DC) plan sponsors that see managed accounts as a way to mitigate some fiduciary responsibility for participant assets, the QDIA distinction is important.

3) For participants invested in them, managed accounts should act as a 3(38) fiduciary—i.e., having discretionary control over trade execution. Advice-based products that offer a wide range of tools and account monitoring services—and may even make recommendations for the participant—are not considered managed accounts, even if the recommendations can be implemented in a single click.

For the more traditional managed account providers, much of their development over the last few years has focused on improving the personalization of asset allocation for participants—especially if the participants neglect to engage with the managed account solution. The process of assessing participant risk tolerance is not standardized, nor is there a standard for which data elements are used in determining an asset allocation, O’Keefe says.

Providers leverage various data points: Some use what is available in the recordkeeping system such as age, gender, savings rate and income, while others employ data points accumulated from the payroll system such as marital status and dependents. While providers can determine a custom allocation without the engagement of the participant, some providers also allow for participants to enhance the information, by adding details about outside assets, for example.

Some providers of managed accounts and model portfolios leverage questionnaires that participants need to complete, which are usually designed to direct the person into a particular asset allocation “sleeve,” O’Keefe says. The number of sleeves can sometimes give plan sponsors a sense of how custom the allocations will get—i.e., whether a participant will be slotted into one of say, five, risk-based pools, or whether the allocation will be individualized based on the data points referenced above.

Plan sponsors considering managed accounts should look under the hood of the program to understand the differences. It may be hard to compare methodologies’ advantages, but differentiation does exist in some quantifiable areas, such as how each product handles company stock or retirement income creation, whether participants have access to licensed representatives or advisers, and what fees the provider charges, O’Keefe says.

Although the growth in managed account assets has trailed asset growth in TDFs, O’Keefe says, interest in the accounts is clearly increasing, as experience and research suggest they may be the better solution when participants reach a certain level of retirement savings or their financial situation becomes complex.

Sub-Advised Solutions Gain Ground

While managed accounts have historically been positioned as independent of the plan administrator, a more recent trend has seen many large recordkeepers—including eight of the top 10, as measured by total recordkept assets— develop proprietary managed accounts that are sub-advised by one of the industry’s established and recognizable investment advisory firms.

Such relationships seek to simplify the experience, for both sponsors and participants, by creating a single source for the accounts, integrating administrative systems, web portals and tools, and communications and education materials. Sub-advised products may also enable administrative efficiencies, reducing the number of contracts and vendors, and pricing flexibility—e.g., Bank of America Merrill Lynch offers Advice Access to participants at no cost.

Still, they often lack portability. Conversely, outsourced managed account providers often maintain connections with multiple recordkeepers, which can simplify conversions. Regardless, whether the accounts are sub-advised or not, they stand to offer plan sponsors and participants many benefits. —Brian O’Keefe

Select Sub-Advised Services

• Bank of America Merrill Lynch Advice Access ASSETS: $13.6b; PARTICIPANTS: 262,402
• Empower Retirement Empower Retirement Advisory Services ASSETS: $28.7b; PARTICIPANTS: 561,673
• Transamerica Retirement Solutions, LLC Managed Advice® ASSETS: $1.6b; PARTICIPANTS: 35,000
• VALIC Guided Portfolio Services (GPS) Assets: $13.2b; PARTICIPANTS: 254,893
• Voya Financial Voya Retirement Advisors – Professional Management ASSETS: $16.4b; PARTICIPANTS: 137,014
• Wells Fargo, Inc. Target My Retirement ASSETS: $1.9b; PARTICIPANTS: 60,000