There are a variety of reasons a plan sponsor may choose to make a managed account solution available to participants, but there are several factors to consider when determining if they are right for a particular plan, according to a new white paper.
In Managed Accounts: A Primer, the Defined Contribution Institutional Investment Association (DCIIA) observes that managed accounts have the potential to add value across several dimensions. One commonly cited reason, the paper notes, is the desire to offer a more personalized investment solution to participants who are actively seeking advice. And while the “core” service of managed accounts is related to investment portfolio management, additional services may include:
- savings rate guidance and projections on retirement readiness;
- tax-efficient investing strategies;
- access to a financial advisor;
- retirement distribution planning and withdrawal strategies; and
- tools that help investors better assess their financial position.
The paper warns, however, that managed accounts also bring an additional layer of costs to the participant and, as such, plan sponsors should carefully consider whether a managed account program is suitable for their plan and its participants.
DCIIA notes that this is the first in a series of papers it plans to publish on managed accounts, with a goal of assisting plan sponsors and their consultants with a detailed understanding of managed account services and how they can be evaluated and monitored. The organization observes that while the use of managed accounts in DC plans today is relatively small, interest (and assets) in managed accounts are on the rise, albeit at different paces.
Consistent with Plan Goals?
Like any change being contemplated by a plan sponsor, managed accounts should align with the overall goals of the plan. And because there are a variety of initiatives—all differing in effectiveness, cost and required fiduciary oversight—that can help address plan goals, it is important for plan sponsors to “clearly articulate” what they are trying to achieve, the paper notes.
For example, auto-enrollment and auto-escalation can help improve participation and savings rates, whereas a re-enrollment into a plan’s TDF can improve the typical asset allocation of plan participants. Managed account services, however, may assist participants with identifying more optimal savings rates and appropriate asset allocation and may help with retirement planning, according to the paper.
If a plan decides to make a managed account service the default for all or a group of its participants, another question to ask is whether the potential benefits are enough to justify replacing the current QDIA option. “The answers to these questions are likely to differ by plan, and by the population group being considered, as well as the way this decision might be approached; therefore, plan sponsors should seek additional guidance from their investment consultant in order to make an informed decision,” the paper advises.
Fiduciaries should also be confident that they have thoroughly evaluated the products prior to their adoption and that they can monitor their service on an ongoing basis. The paper cautions that the evaluation process for managed accounts is typically different than that used when considering other investment-related products, because managed accounts are a service product rather than a particular investment fund.
“Sponsors need to ensure that they review and understand the managed account provider’s investment fund selection methodology, portfolio risk levels, fee structures, various factors that impact personalization, and to what degree those factors impact participant portfolios and their potential to deliver effective outcomes,” the authors state.
Cost Considerations
Managed accounts typically carry a service fee that is incremental to the fees of the individual fund options in the plan, the paper explains. “Since programs are priced differently, plan sponsors should understand how fees are structured, and how favorable or unfavorable a fee structure is, based on the demographics of their participants.”
For example, the paper notes that a flat fee structure may be less desirable for younger participants with lower balances because the fee will be a greater percentage of their assets, but older participants with more complicated financial lives might find it easier to justify paying the additional fee, which is charged on assets held only within the plan.
A plan sponsor should also understand the potential cost of an opt-in versus an opt-out structure. Nearly all managed account providers offer a discounted fee for opt-out programs, due to the economies of providing the services to a greater percentage of a firm’s employees, but the authors note that the size of the opt-out discount varies by provider and may be affected by other factors such as the overall size of the plan.
