Are Managed Accounts the Right Solution?

Managed account options are generating more attention in the retirement savings arena. But, do they make sense (and dollars) for your plan and its participants?

Tailored assistance to investors who want help crafting a well-rounded portfolio sounds like a great idea. But it doesn’t make sense for everyone. Review your plan, participants and other considerations before taking the plunge into more sophisticated and more costly investment options.

The Plan Evolution

In managed accounts, an investment professional or automated robo-advisor creates a personalized portfolio using, for instance, an investor’s 401(k) and 403(b) funds. The portfolio is based on age, risk tolerance, retirement date, wages, contribution rates, spending needs, risk tolerance and other factors. Some accounts allow you to factor in a spouse’s wages and investments, external investments, Social Security and other assets to develop a complete picture of retirement preparedness. Investors receive customized and reallocation advice on an ongoing basis.

While drawing considerable attention, managed accounts are not widely in use, according to Bloomberg’s Pension & Benefits Daily. Financial advisors report that in client plans with a managed account option, only 4 to 15 percent of participants opted for a managed account.

Many 401(k) and 403(b) plan sponsors seek out cost-efficient ways to boost savings and responsible employee investments while displaying state-of-the-art offerings and plans. They recognize that leaving defined contribution plan participants to select for themselves does not always lead to sound financial decision-making. That led to the development of target-date funds, or TDFs. TDFs, however, do not always fit with an investor’s circumstances, needs or goals.

At the same time, record-keeping and advisory firms try to remain competitive by offering managed accounts, which also serve as new fee-generating options. Morningstar Advisory Services, Financial Engines or TIAA Wealth Management deliver advice tailored to each managed account holder. Two top record-keepers by assets, Fidelity and Empower, offer services that automatically transition participants from TDFs to managed accounts when reaching a “triggering” event. Several others are introducing or will soon introduce similar products.

Pros and Cons

Plan sponsors considering adding a managed account option should be aware that it is not for everyone. However, it could be beneficial for both you as the plan sponsor and many of your plan participants. Here are a few reasons to offer managed accounts:

• Some retirement savings plan participants like knowing that professional advisors make their investment decisions. For those hesitant to invest because they doubt their own ability, managed accounts offer the expertise they lack. The feature, whether used or not, could be perceived by employees as a plus – the sponsor offers help, if necessary.
• Personalization through managed accounts offers more precise asset allocations with the potential to improve participant outcomes. If you have a diverse population with varying needs, portfolios built for the “average” participant may be insufficient. Incorporating external investments, like IRAs and spousal assets, and personal retirement goals gives participants greater confidence in their retirement asset accumulation and risk management.
• Managed accounts perform better, on average, than TDFs. Last spring, the Wall Street Journal cited studies showing participants in managed accounts earned an average of 0.24 percent more annually, after fees, than TDF investors. While that difference may evaporate in higher fees, they also found that managed account participants contributed 0.5 percent more annually. That small dissimilarity could make a significant difference over time.
• Costs are deducted from the account, so there is no separate bill for asset management. Asset investment and management are on autopilot for people who do not want to spend time on money management and would rather have others do it for them.

On the contrary, while managed accounts can prove to be beneficial, they may also adversely impact plan sponsors and participants. A few cons of managed accounts include:

• Employee demographics. For instance, the further participants are from retirement, the less likely they are to have outside factors that would require a customized approach. Conversely, a middle-aged employee population is likely to have spousal assets, dependents and an idea of when they may want to retire.
• Cost is a factor that cannot be ignored at any age. Participants pay for personalization. Managed accounts generally cost 0.10 to 0.80 percent more than TDFs. That’s in addition to the cost of the chosen investment funds. Many plan sponsors have been hit in recent years with lawsuits over participant fees because high-fee options were touted even when low-fee alternatives were available.
• Fee structures can differ and need to be negotiated. In some plan designs, the highest fees on a percentage basis are charged on smaller accounts. The lowest fees are charged to those with considerable assets. Take time to compare fee structures and evaluate actual plan participant balances to help determine pricing that works for those who may need the service.
• Participant engagement and data input are critical to garner value. Willis Towers Watson research showed that half of those who sign up for managed accounts do not take the time to integrate the personal data required for customization. Even those who initially provide information about other assets do not deliver regular updates.

Important Factors of Providing a Managed Account Option

Participant financial situations differ, particularly if you have a diverse employee base, so managed accounts may be worth considering. If you look into adding a managed account option to your DC plan, you need to address the pros and the cons in your plan design as the fiduciary.

For example, plan sponsors need to ensure their population’s needs and assets are factored in and their employees are encouraged to regularly keep information up to date if they choose the managed option. Sponsors need to make sure stock options, a defined benefit plan (if you have one) and other savings and investments should be addressed in the managed account design.

When you research providers, fees are an obvious area to evaluate. Additionally, your due diligence should feature a review of the provider’s investment philosophies and methodology, how they weigh factors, what they do to help increase savings rates and how they connect with participants to ensure data is current.

Get Professional Assistance

In conclusion, managed accounts may prove to be excellent to some plan participants. However, it will take thorough evaluation on whether this option will be beneficial to your plan and plan participants. Consider getting unbiased help from a professional consultant that is not tied to an investment fund or record-keeper. They can candidly provide guidance about plan options, participant behavior and governance. PlanPILOT is an independent registered investment advisor, not tied to any funds or investment banks. We help clients control their risks in operating retirement plans and help them deliver the benefits intended. For more information on managed accounts or how we can help your retirement plan administration team, contact us at (312) 973-4911.

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