Managed accounts offer a compelling service, but changes in the product set – and the DC industry generally – may require a second look, according to a new report.
In “Managed Accounts: Today’s Services May Not be Tomorrow’s Solutions,” Willis Towers Watson DC plan investment consultants Jason Shapiro and David O’Meara examine the managed account value proposition and several concerns about the current managed account model, disruptive forces in the industry and the potential for managed accounts to become attractive default options in 401(k) plans.
The report notes that a primary concern regarding managed accounts, particularly in today’s litigious DC marketplace, is cost. The authors note that many providers’ standard fee schedules for opt-in implementations start at 50 basis points or more, in addition to the investment expense from the underlying managers. “While there are fee discounts for considering an opt-out (QDIA) implementation, those fees are typically around 10 to 15 basis points less — so there are still material fees for plan sponsors to consider.”
They write that for an opt-in implementation, one might assume that participants who would opt to use a professionally managed account service and pay the management fee would make full use of the service – that they would provide information about their goals, objectives, risk tolerance and total wealth; use various planning tools; and speak to representatives as needed. However, in their studies of managed accounts, the authors note that they have found that in many cases at least half of managed account participants don’t personalize – and that has led them to be more concerned about participant engagement. “Participants who use managed accounts fully may realize ample value for the fee, but for participants that don’t personalize, it’s difficult to justify the added cost,” they write, going on to caution that if managed accounts are chosen as the plan’s investment default, the number of participants who don’t engage is almost certain to increase.
The authors also note that fiduciary concerns continue to be top-of-mind, and that choosing a managed account provider is a fiduciary decision – making the activities of benchmarking fees and services crucial. However, they note that the differences among providers’ services makes effective benchmarking difficult, a difficulty increased by the fact that some providers are expanding their tiers of service to include the management of out-of-plan assets. They also caution that some providers don’t offer portability – or offer only limited portability – across recordkeeping platforms, which may create unwanted ties between the managed account and other services.
The authors also outline certain “disruptive” industry forces that they say may shape tomorrow’s managed account services, including:
- The incursions of robo advisors that could ultimately drive down fees in the industry.
- The expansion of recordkeeping platform tools to focus on wellness, retirement income and investments has created some overlap with managed account features that they say could lead managed account providers to take a fresh look at their offerings to see where they add the most value.
- The implications of the Department of Labor’s (DOL’s) conflict-of-interest rule.
- The Government Accountability Office’s (GAO’s) 2014 Managed Account report, which recommended a number of factors for the DOL to consider – including consistent fiduciary roles, improved performance and benchmarking disclosures, and oversight guidance – to help sponsors select providers.
- Litigation which has recently been brought against administrators for their fee arrangement set-ups with managed account providers, in both a data connectivity and a sub-advisory context.
A Better QDIA?
They turn to the question of what must be done by managed account providers in order to become more attractive as a QDIA, noting that “first and foremost, costs must come down, particularly as today’s large sponsor can access off-the-shelf, passive target date funds at all-in costs of 10 basis points or less.” They suggest mitigating the concern that many participants who default won’t fully engage with the service by giving managed accounts providers access to non-core menu options in a way that would enable defaulters to access more diversified portfolios than they could by solely using the core lineup.
They also cite a 2016 GAO study that suggested that limited liability relief be provided to plan sponsors that offer an appropriate mix of lifetime income options, and note that a service like managed accounts could help participants determine the most appropriate allocations to lifetime income options.
Technology continues to improve managed account offerings, and the authors note that it is common today for providers to receive data on such things as a participant’s salary, balance, age, contribution rate, retirement age, gender, state of residence, match formula, pension amount, loan amount, brokerage window allocation and outside assets. “This automated personalization allows for customization at some level, even for minimally engaged participants,” they write.
While they note that portability should continue to improve given that explicit ties between a recordkeeping platform and managed account are typically unwanted, they believe that sponsors should have the flexibility to choose the ancillary services they value most, since “certain managed account services add significant cost, which may be appropriate when the sponsor and participants value those services,” though for others, a lower-cost asset allocation service may be more amenable.