Target-date funds continue to garner a whole new generation of defaulted contribution flows – and yet, interest in, and deployment of, managed account solutions continues to grow. This week, we asked NAPA-Net readers about the balance – and the trends – behind these alternatives.
Despite a plethora of options, the vast majority of target-date fund assets has wound up in the hands of a small number of providers. Meanwhile, as participants and their retirement savings “age,” there is a growing sense that they may not be well served by the convenience and (relative) simplicity of “off the shelf” TDF solutions.
Managing Menus
Most (63%) of this week’s respondents have both TDFs and managed accounts in their fund recommendations. However, more than a quarter (29%) don’t include managed accounts, and the rest don’t include TDFs.
And for most (69%), things haven’t changed over the past two years. Nearly 45% have included both target-date and managed account options in their recommendations, while just over a quarter continue to only offer TDFs. Just over 14% say they are currently downplaying TDFs, and nearly as many (12%) are currently downplaying managed accounts. As one reader explained, “Our plans used to have both TDFs and managed accounts, but we have been turning off access to managed accounts for those plans that we can and new plans coming on with us. We feel that the RK website drives participants to unwittingly choose the managed accounts, when the TDF would do just as well for them at a reduced cost.”
Not surprisingly, perhaps cost comes up as a significant factor in many of the responses this week – though not always in the same light. For example, one reader explained, “Oftentimes, the managed account is recommended simply because it can be the key to get really good fee reductions. I know that can lead to ‘proprietary issues’ but we do believe that if communicated correctly and monitored appropriately, they can help.”
“Properly designed managed accounts offer a great low cost solution particularly for older employees,” explained another. Another reader commented that they have “Target date in most all plans. Managed account available is 30-40% of plans.”
“I like the managed accounts much better,”explained another. “They adjust for an investors risk tolerance and other financial circumstances.”
However, another reader cautioned, “No compelling evidence that managed accounts are offering a significant improvement from a performance perspective; to be most effective a participant must be engaged enough to to provide a lot of data to the provider. That’s counterintuitive for an industry that has spent the last decade installing auto features to overcome inertia (which is a phenomenon that we know exists) among participants. Until that problem is overcome, the additional fees are unjustified.”
“Another factor goes into my choice. It is name recognition. Most everyone has heard of V*** , but the managed funds out there are not recognizable.”
“We actually use a balanced fund as QDIA because we don't like the target-date or managed account options,” explained another.
“I honestly do not see where managed accounts make sense,” explained another. “These are great on the wealth management side but not sure it makes sense inside retirement plans. Maybe for the select few who have significant balances and desire ‘specialized’ assistance. In my mind, managed accounts should not be static and feel most are not ‘managed’ on a regular basis.”
“Some of my clients have managed account options,” noted another. “That said, I am not a big proponent of managed account options for 95% of plan participants because their accounts are not large enough to reap the benefit, thus the fee is not warranted. In my opinion, the recordkeepers generally do a poor job of communicating the fees and many participants end up in managed accounts unknowing that they are paying fees they didn’t need to pay. Recordkeepers see this as a way to derive additional revenues. i think recordkeepers should charge per head fees for managed account administration instead of an asset-based fee.”
“It really depends on the plan's demographics, though we rarely recommend managed accounts as either an opt-out or opt-in service due to concerns with engagement metrics and cost,” explained another.
“As managed account fees come down, they have merited more consideration,” noted another, “but there is still not much plan sponsor interest.”
For one reader, anyway, “Managed Accounts are really a recent discussion as so many recordkeepers are pushing them out there and we need to discuss them and the issues with the Committee as an objective and unbiased source.”
Recommendation Trends
Asked to characterize the trend(s) in their recommendations (among those who use both target-date funds and managed accounts):
51% - target-date funds primarily as a default
14% - allow both at participant option
10% - managed accounts as a default
6% - allow either, at plan sponsor discretion
2% - managed accounts for larger, more sophisticated investors
The rest fell into an “other” category, primarily retaining a target-date fund default, with managed accounts being an option, though the “triggers” for the option varied. “Dynamic QDIA - target date below a specific age, managed accounts above a specific age,” explained one reader. “We typically allow both and help the participant understand their features. We have used managed accounts as the QDIA when there is an older population. We have found managed accounts popular with the highly compensated,” noted another. “Managed accounts for over 50 years of age and large accounts,” said another. “Dynamic QDIA that uses both at conversion based on age,” offered another.
Managed account skepticism was part of the equation, however. One reader explained, “Given cost concerns & engagement ‘inflation’ with managed account providers, rarely are they an appropriate fit for the QDIA.” Or, as anther commented, “Don’t use managed accounts. That’s what we are for!”
Driving ‘Ranges’
As for the factors driving the trends, fees dominated that field, cited by 60% of this week’s respondents, followed by:
45% - recordkeeper support/choice
35% - plan sponsor preference
27% - ability to customize (or lack thereof)
And – not surprisingly, asked to winnow those factors down to the primary driver, respondents pretty much lined up the same factors in the same order:
38% - fees
14% - recordkeeper support/choice
13% - plan sponsor preference
6% - ability to customize (or lack thereof)
Reader comments on the subject varied – with performance and participant suitability most frequently cited. Here’s a sampling:
Flexibility of choice based on the participant, and our recommendation to have active money management as an option on the plan at no additional cost to the employer has made us stand out vs the competition.
We watch performance, fees, underlying asset allocation, and style drift. We manage for 3 and 5 year performance.
Best for participants.
Better retirement outcomes. Managed accounts allow for better customization of a portfolio to the individual but it also creates better engagement which leads to better savings rates, better tax optimization, less market impact, etc.
Name brand recognition.
We haven't been able to put managed accounts into our 401(k) plans. We have however been using and updating annually asset allocation models for participants.
Offer participants the maximum number of options.
Participants’ need for more assistance.
We prefer an open architecture 3(38) managed account that does not have a vendor proprietary fund requirement and one that has some customization available based on risk.
Our firm is a producing TPA Firm. For over 20 years, we have been offering Model Portfolios managed to the participant's objectives. For the last two years, we have added Target Date Funds for those who wish an easy but age-based approach to their 401(k) investments that is "set it-and forget it"...
Customization, ‘Stickiness,’ 3(38) role for QDIA, better risk adjusted returns.
The active money manager, if doing a great job, helps participants feel more confident knowing someone more knowledgeable is monitoring and making moves in their account when they may not understand the market.
Performance. We pick the best performing TDFs based on 3 and 5 year numbers and we build asset allocation funds that generally outperform the TDF.
It is all about personalization and the need for advice. Two things that are driving the rest of our economy yet is lacking in the financial services and retirement plan industry. Managed accounts solve this.
Investment philosophy.
Not to be cliche, but whatever is best for plan participants.
Performance.
We prefer using a 3(38) managed account solution to minimize fiduciary liability.
Appropriateness relative to the participant demographics and sophistication.
Meeting beneficiary needs, especially protection in the Risk Zone that spans the 5 years before and after retirement.
Managed account providers add a layer of complexity for plan participants that already have limited understanding of what investing is all about.
Feel that plan participants are better off with professional management than with a investment that mindlessly decreases in equity allocation based only on age of the participant.
Other Comments
And yes, we always leave an opportunity for general comments on our weekly reader poll topic(s) – and yes, we again received a number of interesting perspectives:
Just like TD, not all active money managers are the same either. Match the active money manager’s methodologies to the participants you are shopping for or it will become a negative experience for them.
Managed accounts are appealing but the proof is in the pudding... we continue to see them used by the very folks who probably need them the least (younger, lower balance). Our higher balance, more sophisticated participants have continued to provide feedback that it’s too simplistic or not as sophisticated as they believe they need for their account balance size and personal situation (e.g., it ain’t a financial planner!).
I don't think enough attention is paid to the performance, the fees, the asset allocation and the underlying funds. I determined that there are typically 10 variables for determining the best TDF and of these 10 variables only 4 are really important. Even the best performing TDFs are not very good.
Like financial wellness, the term managed accounts means different things to different people. The devil is in the details. We have built a better solution and believe our plan sponsors and participants will benefit from it.
I believe more than 90% of participants are better served by defaulting them into a target date or managed fund, as having a slew of investment choices is counterproductive to getting the right risk/return relationship.
I am not sold on managed accounts although we have plans that have incorporated them into their line-up. The fee is generally higher and participants do not tend to use them to their full advantage.
Plan sponsor attitudes around managed accounts vary widely. Frankly, much disinformation exist with both options.
I have felt that both have their place in a plan. The vast difference in needs/situations/savings for those 50+ (where I feel managed works well) creates a need for personalization. With the retail world of financial advisors looking to work with clients of higher net worth/investable assets, managed accounts serve a great purpose at a very reasonable fee.
I don’t see the point in using managed accounts. People don’t even understand TDF's let alone managed accounts. Why pay higher fees for something that you don’t understand that won’t necessarily bring you better returns?
The rise of CITs in retirement plans is especially disturbing when they are being recommended by an advisory firm who has created the CIT and is also acting as 3(38). Nobody has been able to explain how this does not create a blatant conflict of interest, which I believe it clearly is. Furthermore, the CITs are more or less needlessly recreating the wheel when most are going to either mimic a TDF or a risk based model, it’s just confusing to the participant and a fee grab from my perspective.
At the end of the day, there is rarely a fundamental difference in performance (looking backward of course) between TDFs and managed accounts, so why pay even more fees to get similar outcomes?
Managed accounts have become an increasingly relevant part of the QDIA conversation as fees have fallen and as more record keepers adopt so-called dual-QDIA solutions that pair target date funds (TDFs) and managed accounts together. These solutions enable plan sponsors to maintain low fees via TDFs for younger investors, which as a group are relatively homogeneous in terms financial resources and investment time horizons, while offering customized asset allocations to older investors as their financial situations and needs begin to diverge. Related trends that are driving interest in managed accounts as default solutions are (1) increasingly robust data collection efforts be record keepers, which allow for personalized advice with little to no involvement from the participant, and (2) the expansion of managed accounts solution deliverables beyond simple allocation customization and implementation. Contemporary managed accounts solutions can serve a very similar role to a traditional financial planner, offering advice on savings and withdrawal strategies, Social Security optimization, and retirement lifestyle determination.
It’s just another way this industry makes investing more complicated and potentially more expensive for the average participant.
in most situations, managed accounts are a way for recordkeepers to generate additional fees. There is very little effort by recordkeepers to really identify participants who have a large enough asset level or complex enough financial situation to benefit from a managed account. In most managed account solutions, there are about the same number of actual portfolio options (8-12) available as there otherwise are available in a normal TDF product. The messaging would suggest a much higher level of customization than actually exists.
Most TDFs use vendor proprietary funds, are not customizable for risk, many are just the same 3-5 funds in each TDF at different percentages and none seem to take consider making any investment weighting changes based on market conditions.
Managed accounts are heavily “sold” and rarely does a sponsor have a thorough, sound fiduciary process to evaluate whether they are appropriate for their plan. TDFs have their warts, though rarely does a managed account service that is 5x-10x more expensive than a low-cost TDF make sense for a plan as the QDIA.
Think there could be tremendous opportunity for managed accounts if the fee issue could be ironed out, and some providers are making progress in this regard; fees are much cheaper than they were five years ago.
TDFs look great in a beta market like the one we’ve had since 2009 but downside management will have its time to shine.
Managed accounts are a superior QDIA if they are face-to-face personal advice, but most managed accounts are robos that defaulted participants really can’t use.
I believe TDFs are the most viable option for most participants. However, Managed Accounts that offer more than fund allocations can provide valuable services.
Thanks to everyone who participated in this (and every) week’s NAPA-Net Reader Poll!
