The Evolution of Managed Accounts
For years, fees have placed a significant roadblock on managed account adoption in the defined contribution (DC) space. But some analysts observe fees are decreasing, as providers tweak these vehicles for maximum efficiency.
“Costs are going down but the benefits are increasing,” explains David Blanchett, head of retirement research at Morningstar Investment Management. “As we move forward, I believe it is becoming increasingly attractive.”
The latest available data by global research firm Cerulli Associates indicate that by the end of the third quarter of 2015, the eight largest managed account providers had a total of $180.6 billion in assets under management, marking a 34% increase from the same period in 2013.
Participants investing in these 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. Some providers even offer income-planning services, which are especially important for investors nearing retirement. Moreover, participants invested in these accounts have direct access to financial professionals.
But are these perks worth the price? According to Cerulli, fees between a TDF and a managed account can spread beyond 50 basis points. Factor that along with 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. And there is no definitive evidence suggesting active investing can outperform a passively-managed portfolio of low-cost index funds.
But that’s not to say managed accounts fail to hit their marks. A study by the Government Accountability Office (GAO) found managed account users tend to have higher savings rates and better diversification, suggesting these could benefit the right employee. A 2016 report by Morningstar reflected these findings stating that increased savings benefits among managed account users are likely to outweigh the costs of such products over TDF pricing.
NEXT: Improving managed accounts
Providers are also looking at new ways to save on costs. Fidelity Investments recently launched an index-based managed account, and it’s also offering a service with 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 like Morningstar and Financial Engines have incorporated income-drawdown advice into their managed account offerings.
Some analysts say such moves indicate a wider trend surrounding the development of managed accounts.
“Five or ten years ago, it was focused on building an efficient portfolio using the plan’s core options,” says Blanchett. “Now, it’s more focused on helping participants build a financial strategy that incorporates accumulation but also distribution.”
John Croke, Vanguard, Head of multi-asset product management, agrees. “It’s something the industry is going to spend a lot more time on—thinking about how we deliver a solution in a holistic fashion where we’re considering social security, other sources of income and thinking about how to help people prepare for out-of-pocket medical costs.”
But to succeed, such a solution needs as much participant input as possible, despite any limitations in technology and data gathering.
“You need to be proactive about how you create awareness amongst your participants about a managed account offering and how you articulate the benefits,” explains Croke. “If you don’t get the engagement from your participants, you essentially end up with a managed account provider building a TDF that’s 20 or 30 basis points more expensive than whatever TDF is in your lineup.”
Croke says the solution may come in the form of technological advancements such as aggregation tools that plug into participant’s financial accounts outside their employer’s plan.
But before bringing it over to the investment menu, selecting a managed account provider can pose a challenge.
NEXT: Best practices for managed account evaluation
Because of the customization behind managed accounts, there is virtually no clear performance benchmark. But plan sponsors can make a decision based on the manager’s level of experience, investment philosophy, and most importantly its asset-allocation strategies.
If all this adds up with the sponsor’s general philosophy and the needs of the plan’s participants, then a managed account could serve as an attractive and effective option for certain employees.
A study by Vanguard found that typical managed account holders are older, more tenured, and have larger balances than the average employee. The finding makes sense considering the financial lives of younger employees entering the workforce don’t tend to be as complex as those of older employees. And as accumulation is likely younger employees’ top goal, a TDF can suit them well. But an older individual with different financial needs may benefit from the added advice and customization behind managed accounts.
When it comes to evaluating a provider, a paper by Manning & Napier Advisors suggests sponsors should consider how the provider defines participant success. For example, a provider can believe retirement readiness is being ready to replace 70% of the last working year’s salary, while the plan sponsor may believe aiming for 90% is a better goal. Both of these philosophies will substantially affect asset mixes—and in turn—retirement readiness.
Sponsors should also know how the manager defines risk. One can be more conservative when a participant is doing well and take less risks to preserve assets, while another would be more aggressive believing a high balance justifies maximizing it to its full potential. Either school of thought will also have a major effect on asset allocations. Manning & Napier notes “While there is an intuitive/natural desire to select ‘best in class’ managers on the single asset class side, we believe the asset allocation decision is even more important. In fact, several studies have been conducted on the importance of asset allocation versus security selection decisions.”
Any strategy of course must be able to adapt to major changes in the market, so it’s important to know how a provider would rebalance portfolios in light of this.
“It always comes down to firm process, philosophy, and stability,” says Croke. “Make sure they have a well-informed, thoughtful view of the capital markets, how to construct a portfolio, and what assumptions need to be made around savings behavior and drawdown behavior.”
“Managed Accounts in Defined Contribution Plans” by Manning & Napier Advisors can be found at maning-napier.com.
“A Powerful Combination: Target-Date Funds and Managed Accounts” can be found at Institutional.Vanguard.com
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