UpFront | Published in June 2017

Managed Accounts Mature

Some analysts observe that fees are decreasing, as providers tweak these vehicles for maximum efficiency.

By Javier Simon | June 2017
For years, fees have placed a significant roadblock on the adoption of managed accounts in the defined contribution (DC) space. But some analysts observe that fees are decreasing, as providers tweak these vehicles for maximum efficiency.
“Costs are going down, but the benefits are increasing,” says David Blanchett, head of retirement research at Morningstar Investment Management. “As we move forward, I believe [managed accounts are] becoming increasingly attractive.”
Participants investing in the accounts have the benefit of having a professional construct a portfolio unique to their goals. The asset allocation and investment strategies are influenced by various data points including age, gender, savings rate and value of outside assets.
But are these perks worth the price? According to global research firm Cerulli Associates, fees between a target-date fund (TDF) and a managed account can spread beyond 50 basis points (bps). Factor that along with the fees of underlying funds and the price of active management—often found in these solutions—and one could be looking at a serious price tag. Plus, there is no definitive evidence suggesting active investing can outperform a passively managed portfolio of low-cost index funds.
But that is not to say managed accounts fail to hit their mark. A study by the Government Accountability Office (GAO) found that managed account users tend to have higher savings rates and better diversification, suggesting these could benefit the right employee. A 2016 report by Morningstar reflects these findings, stating that increased savings benefits among managed account users are likely to outweigh the costs of such products over TDF pricing.
Providers are also looking at new ways to save on costs. Fidelity Investments recently launched an index-based managed account, and the firm is also offering a service in which it uses participant data such as age and balance size to determine if new employees should be defaulted into TDFs or managed accounts. To improve retirement readiness, firms such as Morningstar and Financial Engines have incorporated income-drawdown advice into their managed account offerings.