Managed Account Innovations Call for Second Look

Some providers are encouraging a type of hybrid approach, bringing together the best of both TDFs and managed accounts. 

By Javier Simon | October 20, 2016
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Managed accounts are often seen as highly personalized and customizable investment vehicles that can closely match risk taking and risk tolerance; despite a growing number of managed account offerings from providers, however, usage of the investment vehicle is still somewhat low.

Tim McCabe, national sales manager at Stadion Money Management, is squarely in the camp that would like to see managed account usage grow significantly. He estimates the market share for managed accounts (i.e., the number of plan participants who currently own managed accounts) to be around 6%. Matt Brancato, head of Vanguard DC Advisory Services, puts that number even lower, at 4%.

McCabe attributes this low engagement to certain “hurdles” the industry needs to overcome, including the high fees historically associated with managed accounts and the complexity they’re often perceived with. Nonetheless, he says certain advantages such as new technological innovations and more advanced/responsive asset-allocation strategies make modern managed accounts a compelling competitor for a given retirement plan's qualified default investment alternative (QDIA). 

Stadion, for example, has built out a solution called StoryLine. This managed account utilizes underlying exchange-traded funds (ETFs) rather than the mutual funds typically available in plan sponsor investment menus to achieve significant cost savings. 

“Managed account providers will always charge an overlaying fee on top of the funds in the plan,” explains Stadion CEO Jud Doherty. “Historically that has made it difficult to compete with some of the lower cost options, such as indexed target-date funds. In our case, we use a pool of ETFs to build the managed account, and they’re generally much less expensive than the funds in the plan.”

McCabe explains that, by using ETFs in the StoryLine managed accounts that range between eight and 18 basis points, “it makes the proposition of building and offering managed accounts a lot less expensive.” He says this method brings down the costs of StoryLine to levels “far below what the firm could have charged a decade ago.”

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