Though they comprise only a small portion of total DC assets, managed accounts continue to gain traction and some plan participants stand to benefit from a managed account program, a new study suggests.
According to the Cerulli Edge―U.S. Retirement Edition, 1Q 2021 Issue, the customized, professional advice and investment management offered through a managed account can be instrumental to improving retirement readiness, particularly for those near or in retirement.
From delivering advice in a more streamlined fashion to broadening their offerings to include financial planning services outside of traditional DC portfolio management, providers are “striving to deliver” more comprehensive, holistic advice—and do so more efficiently, the report explains. One key area of innovation involves the collection of participant data.
“Rather than having participants manually gather and transmit a variety of personal data points to their managed account provider, several platforms now automatically extract participant-level data from the recordkeeper, effectively streamlining the data aggregation process,” says Shawn O’Brien, senior analyst at Cerulli.
In fact, one managed account provider shared with the firm that they are receiving 8 to 14 data points straight from the recordkeeping platform. Furthermore, providers continue to incorporate a broader range of inputs to attain a more holistic view of the participant’s financial situation and use that information to better tailor their recommendations.
As for concerns about how retirement plan providers use, or potentially misuse, personal data, Cerulli notes that managed account providers have received “little pushback” from participants when it comes to their personal information. “One managed account provider notes the ‘trust factor’ is an important issue to consider with data collection, but ‘people tend to be OK with us using their data if they feel they’re getting value out of it,’” the report states.
Cerulli notes that this sentiment is consistent with findings from its 2020 401(k) Participant Survey, which suggests 401(k) participants are generally comfortable sharing a variety of personal data points if those points are used to personalize their investment advice and financial wellness experience.
And while personalized investment management remains the core offering for managed account providers, guiding participants through non-investment-related financial complications and other more immediate financial considerations allows managed account providers to engage a broader range of the participant population, the report notes.
“Some plans may offer similar services through their recordkeeper or plan advisor, so providers should work with their plan sponsor clients to evaluate whether it makes sense to leverage the financial planning and wellness services offered through their managed account provider and, if so, how to craft targeted communications toward participants who might benefit from these services,” O’Brien adds.
As a start, providers should consider crafting communications tailored to high-balance participants at or near retirement, highlighting the potential benefits of working with a financial advisor who can guide them through the complexities of transitioning into the decumulation phase of their financial lives, the report suggests. Additionally, plan sponsors and providers might consider targeted messaging for “high risk” participants who, for example, may not be making sufficient plan contributions or have inappropriate investment allocations.
Enhancing Advice
The report further observes that many DC managed account providers use technology to enhance advisor-participant engagements, rather than replace them.
Although low-cost, digital advice solutions have gained traction in the retail space, many of the top managed account providers strive to blend the efficiencies of a digital experience with the advice and expertise of a financial advisor and, in some cases, are quick to distinguish themselves from “robo advice” solutions, the report explains.
Moreover, while the algorithmic, scalable nature of digital advice may generally come with lower overhead costs, Cerulli suggests that financial advisors are often better suited to address the behavioral aspects of saving and investing, which may be particularly important during periods of market volatility.
Looking Ahead
As of the fourth quarter of 2020, the top nine DC managed account providers comprised more than $400 billon in DC assets and the vast majority of DC recordkeepers now partner with at least one managed account provider, the firm notes.
In addition, more than a quarter of 401(k) plan sponsors (28%) offer a managed account, but adoption is notably stronger among larger plans with at least $250 million in plan assets (44%). However, 17% of plan sponsors overall plan to offer a managed account in the next 12 months.
As for the possibility of plan sponsors selecting managed accounts as their QDIA, nearly half of target-date managers expect managed account use as a QDIA to increase during the next one to three years.
That said, even though managed account fees have generally come down, many target-date managers and other providers still view them as being too expensive relative to TDFs, the report observes. “This perspective is important to note because cost is consistently one of the top factors that plans sponsors consider when selecting a QDIA.”
Dynamic QDIAs, whereby a participant is defaulted into a TDF but is automatically transitioned into a separate solution, such as a managed account or managed payout option, upon reaching a specific threshold (e.g., age, account balance), continue to lack widespread adoption, the report further observes. Still, more than 90% of target-date managers suggest it is at least “somewhat likely” that the next generation of TDFs will include products that transition participants to a managed account.
