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READER RADAR: Readers Reveal Mixed Messages on Managed Accounts

Managed Accounts

One of the more eye-opening findings of the 2022 NAPA 401(k) Summit Insider had to do with managed accounts—and this week’s polling reveals a similar split.

Yes, over the past couple of years managed accounts (re)emerged on the scene with some enthusiasm, at least in the advisor community. These options purport to provide a more customized solution than your traditional target-date fund, and one that also—at least potentially—brings to the fore the insights and perspective of the plan advisor.

But a surprisingly strong plurality of the respondents to the2021 NAPA 401(k) Summit Insider viewed them as… a negative game changer. 

So—although many readers are out on vacation (or business) travel, and while the respondents aren’t the same as those to the NAPA Summit 401(k) Insider (not to mention the markets are feeling a little different now than they did in April)—this week we thought we’d see if we could get some insights from NAPA-Net Readers. 

Managed Account Use

Two-thirds of this week’s respondents are using managed accounts in their practice, 18% are not, and another 13% qualified that by saying “not yet.” The rest said they had used managed accounts, but didn’t any longer.

And boy, did we get a lot of comments on this—and an inkling of why so many in the Summit Insider seemed skeptical. Here’s a sampling:

I am an investment manager for individual clients and have over the last 32 years outperformed the S&P 500 TR. Only 17.5 years can be verified since 14 years were with a wirehouse. The odds of doing that are one chance in 262,000. Given that we encourage participants with $50,000 or more in their account to do our managed account. We also prepare a gap analysis and glide path on a quarterly basis for each participant showing how successful they will be in replacing 130% of their paycheck. 

As a voluntary option only not the default QDIA. 

We started to launch them over the past two years in partnership with a few recordkeepers. Our original hesitancy is that we do not feel that advisors should be compensated extra for offering managed accounts, it was important to us that no extra compensation existed. Additionally the biggest challenge with managed accounts is the exorbitant additional expense the recordkeepers charge for very little relative “extra” work on their end. Philosophically we think managed accounts are a good thing, but many recordkeepers use it as a money grab which prevents us from launching it across all of our plans.

We have them on some of our plans. We don’t really promote them much at all. I do not take any extra compensation for them.

We build and manage model portfolios for our clients’ plans. We don’t promote the recordkeeper’s managed account solutions.

I just don’t see how the cost and time can justify a better outcome that any of the top performing target date funds. Benchmarking custom managed accounts can be difficult as well to meet the standards and process set in an IPS. 

For managed account customization to be of any value, total engagement by plan participants is required. I still have seen no evidence of that happening on a wholesale basis, so the ultimate (and likely only) beneficiary of managed accounts is the provider of managed accounts, due to the significant increase in fee capture associated with them.

Generally, we use the product offered through the recordkeeper, where the employees might be able to get “free advice” if it is a one-time implementation, or an asset charge if they want it ongoing.

We use them in a limited way…* has a free program which we use on their platform. Outside of that we allow RKers to include but don’t push if it costs extra.

We have just begun rolling these out. We are recommending the adaptation of managed accounts, but ultimately still deferring to plan sponsors. Most are receptive and want to add to the plan, however some do not. We use Stadion’s Storyline product and have negotiated the price of 20bps for participants. Having an independent low cost provider was important to us. Neither us nor the recordkeeper shares in any revenue or receives any additional compensation. 

I do my own education and promote TD funds and reenrollments.

They are normally an option using the Recordkeeper’s platform. We have started doing more of a hybrid QDIA with TDFs up to a certain age (typically 50 or 55) and then managed accounts above that age.

We typically will add to our plans as an option but don’t push/promote them. 

We have a few clients with them but we do not actively market them nor do we take extra comp.

Many plan sponsors want the managed accounts for themselves and many participants (I’m sure) accidentally end up using them. 

While most participants are satisfied with the fund line-up chosen by the fiduciary process, i.e. Designated Investment Alternatives (DIA) including a Target Date series, some participants want a more active approach. A managed account either by a 3rd party manager within the 401k recordkeeper or an outside manager or advisory relationship for their funds. These have always been an option available for our plan clients.

I use them in all 401k plans which tend to be large also use a sleeve of TDFs as well and we take a look at participant data regarding to or thru, whether a DB plan is in place, etc. and have discussions with plan sponsors.

Feels like a conflict of interest and in general poorly thought out as it applies to small-to-mid market.

Managed accounts had zero utilization without direct advisor involvement. We were not willing to make managed accounts the QDIA. 

We create model portfolios at no additional charge so we don’t find it worthy for the complexity of a participant answering detailed questions to customize a managed account only to end up in a very similar allocation with an additional cost. 

…the answer is “yes, but.” Some advisors use pre-fabricated products from RK’s but there’s not been large scale adoption. We have issues with cost and data.

I feel it’s the most viable solution to scale advice for all in a non-biased way.

Feels like a conflict of interest and in general poorly thought out as it applies to small-to-mid market.

Managed accounts are currently set up to benefit primarily the recordkeeper and to some extent the advice engine and are very expensive. I would like to start using managed accounts when they are managed by the advisor, primarily pay the advisor, and are low cost to the participant. Some recordkeepers are working to build out these capabilities. I would also not currently propose managed accounts as a plan’s QDIA, unless requested by the employer, as this is not the industry norm.

We offer it as a product for FPs to sell.

(1) We are plan level fiduciary only (2) Inconsistent pricing from recordkeeper to recordkeeper (3) Too expensive as a QDIA.

It’s becoming more popular, acting as a 3(38) fiduciary it’s a standard of care, for new plans or for current plans. At the end of the day a lot of Recordkeepers offer these services, as a hidden fee, and I hate seeing that, when we can offer these services for no extra charge, it’s our job.  Different plans, different employee populations, different choices, we don’t have a cookie cutter allocation but it’s designed plan by plan, at the end of the day it is tailored to empower organizations to make informed decisions about offerings that will support employees long term goals. We focus in two areas: 1. The first option under our Asset Allocation services are the ability to offer up to five risk-based models. We also offer two versions of the five models; one version includes alternative investments, and the other does not. Additionally, we offer models with a US Biased and models without a US Biased. When using the risk-based models we provide a questionnaire for your participants to help them determine which model might be most appropriate for them given their goals, needs and risk tolerance. The participant can then select the model and their investments will automatically be allocated according to that model. In determining which investments will be used to populate the models. 2. The other option is our target date models. We have created three different glide paths based on risks that participants are likely to face over time and during retirement. Similar to our risk-based models, these models are incorporated into the recordkeeping platform so that your participants can select their retirement date and their assets will be allocated according to that model. If you choose to use one of our target date models, we will be the investment manager and will therefore decide which funds in the plan will be used to populate the models. Our risk-based and target date models are not static in that they will change based on the advice and IPS. When that committee changes the allocation to any of the various asset classes, we will work with the recordkeeper to implement those changes within the models offered by the plan. We will also work with the recordkeeper to determine the frequency of when the models will be rebalanced so that existing balances are in line with the allocations of that particular model. 

I work so hard to get people to put money in their retirement plan that it seems counterproductive to take some of the money back in fees. I do admit that older participants should have access to managed accounts to ensure they are not taking too much or too little risk. Building managed accounts in target date funds seems a good way to go.

I’ve heard the details and I’m still not a believer. It’s a trumped up service of throwing advisors at participants using packaged investments that are questionable at best.

We primarily use Managed Accounts through recordkeepers.

I have some legacy accounts from the early 2000s but stopped new managed accounts about 2006. 

My clients tend to be small and we gather data around their outside assets via one on one meetings. There just hasn’t been the need to add managed accounts in plans for the cost.

There was a time that I was a big fan in pushing them. But now I’m much more of the opinion that just sticking with a long term buy and hold strategy with a Target Date is the best for most participants. I don’t push this a lot but would agree with Shlomo Benartzi: 90-10-90.

We use them with all of our clients, but not as the QDIA.

We strongly believe they are a significant upgrade from TDF portfolios and feel there is ample research that shows the benefits for those participants utilizing them. 

We do but in a different way than most advisory firms. Being a bank we currently provide a separately managed account for participants that want our wealth management partners in the bank manage their retirement plan assets. Typically, this is tied to participants that we already have an individual wealth management and planning relationship with outside of the plan.

My view is managed accounts as designed today are an extra layer of fees that isn’t justified by results. They can actual hurt participants by making asset allocations without a full understanding of the participants needs and resources.

Some of the plan sponsors we work with maintain them, though we are neutral as to whether they can have an effective role in a retirement plan. 

They are expensive hype.

Managed Accounts are often offered as a solution from the recordkeeper, but we do not offer any of our own managed accounts, nor do we take revenue from the vendor provided managed account solutions.

Use/Promotion Versus 2 Years Ago

We then asked readers how they used/promoted managed accounts compared with two years ago:

57% - About the same

32% - More

11% - Less

I am not promoting them for use in 401(k) plans, but if I do a rollover it is into a managed account 95% of the time. 

During our educational meetings we reference it as an additional “set it and forget it option” that more customized.

I haven’t found the extra expense to be worth it. Seems participants would be better off in target date funds... similar returns with less expense. 

Free version we promote—paid version we do not promote.

Highlighting the advantage for participants to remain diligent about having their retirement account reviewed regularly so they are staying on track. 

This was not even on our radar two years ago. We promote them as customization of the portfolio and having an advisor to guide the participant through saving for retirement. We promote this as a service that will keep them appropriately invested and drive better outcomes. We do not promote this as a way to “improve performance.”

I don’t promote them to the typical plan participant. Too high of a cost.

We still don’t use them.

We removed all managed accounts from our plans.

Per the above answer, we have issues with cost and data. More often than not, a TDF is a far more cost-efficient play. Many of the managed account products require lots of participant involvement in providing data. It’s not easy. Thus, “promoting” managed accounts is not something many of our advisors do.

Trying to get it on every platform to deliver for all.

FPs are becoming more accustomed and open to hearing about them and using them. 

If prices come down.

I am not suggesting managed accounts now.

I no longer believe in managed accounts. I use target date funds instead. 

With the cost of our custom allocations coming down we promote them more, but it is about education not selling them as we do not make extra revenue off of them.

Reasons For…

The most commonly cited reason for using managed accounts was that they were more customizable than target-date funds—more than double the second-most cited response (better fees for the participant). A close #3 was that there was more advisor involvement in the design, with more distant rationales including promotion by their organization, and access to a collective investment trust (CIT).

Readers had an opportunity to expand on those responses—and they did:

Better performance. We do charge 2% for the first $2 million and 1.75% on amounts over $2 million (tiered) based on the total assets in the 401K. We do not cover trading costs which run less than 25 bps on the average (we do not trade often). Those fees are less than the 3%+ real fees in mutual funds (Scale effects in mutual fund performance. the role of trading costs by Edelen, Evans, Kadler and a number of other studies including DOL reports showing there are up to 17 fees for mutual funds most of which are hidden). Our managed account is less expensive and has better performance.

The real reason is they may appeal to plan sponsors and limit issues competitors of mine can identify. Those competitors would imply I am not doing my job by not offering them to plan sponsors. They are looking for any angles to drive the wedge of uncertainty in the plan sponsors mind about our firm’s competency.

We tend to use them when participants are looking for interaction with us as their advisor. TDFs are for the set it and forget it crowd.

In an attempt to provide another layer of fiduciary protection for the plan sponsor/committee...

They are valuable for an engaged participant, for the typical unengaged participant it can be a counter productive waste of money.

Just another arrow in the quiver for clients who may be looking for this as an alternative alongside the TDF suite (which would still be the plan’s QDIA). Ultimately, we offer it because our competitor’s offer it; similar to 3(38).

Today’s structures are getting less expensive, provide more than an asset allocation strategy and provide benefits even to participants not in the solution through overall fee reductions.

They are another vehicle for participants to use who may need advice Managed accounts have been slow to reduce their fees to appropriate levels.

They allow participants to develop a more personal asset allocation strategy.

We don’t use managed accounts because: Lack of quality data, Fees, Scalability, Fiduciary Concerns.

I remain concerned about the additional expenses relative to the improvement of outcomes.

Not better fees if the participant opts in to the managed account—they are very expensive. But sometimes, everyone else in the plan gets better recordkeeping fees if the managed accounts are offered.

Good to offer so that participants that need more help can have a good option to go to.

Managed accounts give participants personalized risk-based capability at a cost that is lower than what is offered through typical wealth management and makes it available to more people, especially the rank and file who don’t usually have access to a personalized wealth manager.

We use a Managed by Morningstar approach with many of our accounts. This provides as option for employees to have a basic overview of their entire portfolio while just managing their 401k account directly. The employees who use it are averaging a higher return than the target date funds.

‘Game’ Change?

We also asked the question that was the eyebrow-raiser on the Summit Insider—where a clear plurality saw managed accounts as a negative game changer. 

The “take” here, with this group (that does have overlap with the Summit Insider respondents—was more balanced. Roughly a third (34%) saw them as a “negative” game changer, though slightly more (38%) saw their impact as positive. The remainder split nearly evenly between “too soon to say” and “much ado about much.” Readers were willing to expand on that—here’s a sampling: 

There was a book “The Myth of Excellence: Why Great Companies Never Try to Be the Best at Everything” by Crawford and Matthews. They say there are five attributes. Great companies find one attribute where they dominate; one where they excel, and are average on the other three. For AFC we dominate on our product (performance), we excel on access and are average on service, experience and price (we charge a fair price). We believe most of our competition places their value on service. I disagree. There is a trust company in Seattle that dominates on service. The advisor told me about his day. He has one client for example who sometimes calls him when it is raining (and it rains a lot in Seattle) and asks him to come walk her dog. He does. She will call him when she has been shopping and forgot something at the grocery store. She asks him to go to the grocery store and get what she forgot. For me that is the ultimate in service.

For us it’s totally neutral, we talk about them to our clients because it’s an option but offering it or not offering is not a value add for us.

I have yet to see the extra benefit to justify the extra cost. Willing to have my mind changed about it... proof is in the pudding.

For the free service the acceptance rate is below 2%. Risk Based and Target Date portfolios have a high acceptance rate especially from new hires.

I don’t believe we have much utilization, but I guess any amount of usage can be good.

Low participant adoption.

Useful tool used well money grab if not.

This is another value add we can offer our plan sponsors and participants. If they do not choose to utilize a managed account—that is great too.

Added fees and it takes away from my position as an educator. I see it as a positive for the large plans where personal service can be a challenge.

It’s been an option for participants on certain Recordkeeper platforms for a while now. We do not build them. Most people who enroll in them don’t understand what they are actually enrolling in so they don’t complete all of the financial questions to have a proper managed account built for them. It ends up being like a Target Date Fund allocation anyways.

I think they add value for the right participant as they offer a customized solution.

They are very expensive and the results are marginal.

We don’t get paid on those assets inside the fund window.

Participants come in all shapes and sizes. Providing them with investment alternatives that meet their financial needs helps promote greater participation and engagement in achieving positive retirement outcomes. Whether they are provided depends on the needs and desires of the plan sponsor and participants.

I think advisors who embrace employee education can use managed accounts discussions to really open the door to wholistic planning and discussions of outside assets and potentially outside assets.

Positive but again they need to reduce their fees EFE for example tends to move assets to index funds and that is what their model.

I think most are viewing it as a way to scale with more revenue, but still struggling with issues there.

Managed accounts are only as good as the data. Most managed account solutions fail to automatically capture data that should be available to the recordkeeper. Adding in outside assets is incredibly time-consuming and difficult for the participant. Profitably scaling managed accounts is unlikely unless the managed account is a QDIA.

Just a way for advisers to get additional revenue in a hidden format.

Solve for cost and data, and we’re all-in.

I think most are viewing it as a way to scale with more revenue, but still struggling with issues there.

Once most recordkeepers offer advisor managed accounts that also have an age-based glidepath, and can be recordkept at a very low additional price to the participant (5-10bps), and allow the advisor to charge a fee to those in the managed account—then I will use managed accounts across my entire client base. I would probably charge 5-15bps. If total managed account fees exceed 20bps, you cannot expect the managed account to outperform a comparable TDF over the long-term. How are we helping participants? So what if it is customized, if their net returns are worse.

Good for those participants that need investment help and guidance.

We’ll see where they go, will it be more angled toward getting rid of advisors? Or will it be an actual customized helpful service? And I won’t be asking the RK to answer that.....

I feel they can directly help those closer to retirement to better customize savings.

They are a solid compliment to TDFs for those participants who wish to take the time to further personalize their portfolios.

Target date funds perform better given lower costs.

I think the fee outweigh the benefits.

Personalization is required and expected by most consumers.

Particularly with regard to so called “Advisor Managed Account” platforms at some recordkeeping firms, we need some guidance on how being a 3(38) at the plan level and at the participant level can be navigated so as not to create a conflict of interest when the “Advisor Managed Account” is selected as the QDIA.

Better performance in down market.

You can’t do personalization without getting all of the information needed. That means a full and comprehensive planning session is required which is not how managed accounts work in 401(k) plans.

Until there is demonstrated proof that such accounts create larger accumulations for participants than TDFs, this is indeed much ado about very little.

Recordkeepers trying to steal from me.

I do think the collective trust/managed account solutions are creating more complexity for plans & investment menus. (This speaks a bit more to retail collective trusts in general.) Emphasis on them from Advisor Aggregators to create more revenue is negative game changer. As a solution from recordkeepers, it is an evolution/reaction to ever-compressing margins for basic recordkeeping services. 

Closing Comments 

I think I gave the reason we use and why it is our value proposition. Most of our business is on the individual side. I have been “playing” with 401Ks and attending the NAPA Summit for a number of years. One day soon we will place a focus on 401ks. To date we have less than 10 but we do have a prototype plan that was $1.6 million in 2016 and is now $4.5 million, a good portion of which was organic growth. When we took the plan over of the 18 participants not one was on a glide path to replace their paycheck. Now over half are. I believe once we seriously launch our marketing of 401ks we will have a great story to tell.

I have tried to use models in place of managed accounts as they have a much lower fee, but so far the uptake is not high. Partly that is because Empower buries the models in their website and puts the managed account as the first option for new hires when enrolling, which I don’t like.

We have concerns about managed accounts that charge additional fees for the service—especially when it’s not clearly communicated to participants that they pay an additional fee on top of fund expenses. I’m surprised how often participants still don’t understand this. We don’t charge extra for our model portfolios.

I understand the theory (Target Date to age 50—managed thereafter)—I see it as a money grab and not in the best interest of plan participants. Free I like—paid service, I do not like.

I stand pretty firm on my initial comments that I just don’t see how the cost and time can justify a better outcome that any of the top performing target date funds. Benchmarking custom managed accounts can be difficult as well to meet the standards and process set in an IPS. I do however use an RK’s internal managed account option that is built using our core fund lineup.

I don’t like the idea of them being a default, because of the extra cost and because they are more beneficial when outside factors are taken into account.

If it is merely a way to drive revenue it is unethical, if used to help participants it CAN be good but I haven’t seen a lot of that… I see more benefit to advisors and platforms.

My main concern is the additional cost to participants. However, we feel that at 20bps this is a service that will ultimately drive better outcomes. I also worry that this may give a false sense of confidence to participants (for example, since they are using a managed account, they may think won’t lose money in a downturn). However I feel we can overcome this with proper education about the product on the front end.

Managed accounts may make sense for some participants. Personally, I don’t use them as a QDIA and only as an opt-in service.

Worried about justifying extra fees over target date funds. Searching for ways to prove these are worth the extra costs.

I just can’t see why charging fees for an asset allocation portfolio is a great idea, and certainly not for the default option. Plan sponsors have no benchmark for monitoring them...I just think fees + no benchmark = lawsuit coming.

My concern is that a lot of managed account fees are extraordinarily high and promoted for the wrong reasons like receiving additional compensation. Take the * models that are being promoted in the industry, there are a lot of Advisory groups that are building these and receiving compensation on them to the tune of like.. * receives 17 bps, recordkeeper receives 17 bps and the Advisory Group would receive 17 bps. We will not build compensation into models as it can be construed as leading a horse to water for receiving extra compensation which is a huge conflict in my opinion and a time bomb waiting to explode on the legal front.

There are many potential managed options and some are good and some not so good. Providing them in a plan is a fiduciary decision for both the plan fiduciaries and investment fiduciaries. Documentation supporting and approving the use of any investment option including a managed account option is a prerequisite as well as ongoing monitoring of the effectiveness and maintaining any investment option.

Target dates are a great start for a newer investor in a situation where we know little about them, they know little about investing and don’t have additional investments outside of the qualified plan. Once the assets have grown and/or the participant has accumulated assets outside the plan, technology today allows better integration of additional sources and can provide not only asset allocation advice on a more wholistic scale, but also help participants preview and understand distribution strategy—which rarely gets covered in the DC education conversations. And let’s be honest, 25 basis points of cost isn’t the reason most participants can’t retire. Starting early, saving enough are a much larger impact and managed account solutions can add alpha along with way by driving proper investor behavior like staying the course and using features such as rebalancing, pre-post tax strategy and automatic increases to deferral rates.

They clearly need to understand the fiduciary risk of not having competitive fees vs benchmark. There is a conflict with RK and MA and it is an issue.

Feels like there needs to be a fluid rollover solution built in.

They are a very nice tool to offer to plan participants, but the way RK use the service to impact the overall RK fees is problematic. I firmly believe any ‘excess’ revenue from a managed account service should go back to the participants who paid those fees and used to reduce the fees of the managed account service, NOT used to offset the overall RK fees. I have concerns that in the current fee litigation environment we are in currently the pricing approach being taken by all RK’s is putting a target on the Plan Sponsor’s back. It’s just a matter of time.

I have major fiduciary concerns with the current state of managed accounts. Current litigation on managed accounts makes me believe managed accounts are not a prudent option for a plan. I think managed accounts are a trap advisors should avoid. I have doubts about the long-term viability of plan advisors rolling participants’ assets out of plans. There will be more litigation on managed accounts. Building managed accounts into an advisor’s business model is potentially short-term profitable but not worth it in the long term.

Too expensive and too complicated of a process for participants.

I worry about advisors designing portfolios without the proper training, knowledge, contracting, etc.

We only use managed accounts to address the needs of participants that need more investment help and guidance.

Scalable growth model for Advisors to attract and do more with participants, show value to the plan sponsor they are servicing.

I think they are the next phase of the QDIA, but I have seen plan sponsors not yet willing to grasp on to the concept, as they are preferring to stay with status quo.

We do not ‘double dip’—I don’t understand how an objective fiduciary can rationalize getting paid more on certain options in the plan.

Managed accounts are largely a profit center for recordkeepers whose margins have been squeezed (or for advisors owned by PE firms looking for more revenue).

Managed accounts work best when they are easy to explain and understand.

Fees need to come down. Toooooo many hands in the pot.

Recordkeeping platforms are using them to generate more revenue. We make them turn the feature off. From a fiduciary standpoint, who is doing the due diligence and on-going monitoring on the record keeper managed account solution?

I do not recommend managed accounts, and they are usually removed as a feature in plans of new clients. How does a fiduciary confirm that the performance is worth the added expense when the allocation is different for every participant? The allocations of managed accounts that are offered by recordkeepers are often eerily similar to an age appropriate target date fund, but much higher expense.

Tough to prove that they actually work, which is the primary knock on them (fees, another knock, have been declining rapidly...)

Every study I’ve seen shows that people who have advice have better retirement outcomes, after fees, than people who self direct or use target date funds. A real managed accounts experience is more personalized than TDFs and includes advice about savings.

Wow—ultimately it seems like readers are split—though those who took the time to comment appear to be far more skeptical for a number of reasons. It all seems to come down to managed accounts could, and for many already are, a benefit—but not for all. At least not yet.

Thanks so much to everyone that helped put some context and provide insights on this issue!