Managed Accounts: Key Considerations

Peg Knox, with the Defined Contribution Institutional Investment Association (DCIIA), says plan sponsors have many things to review before selecting a managed account for their DC plan.

As fiduciaries, plan sponsors have a responsibility to act in the best interests of their participants, even as they explore including more services and solutions to help them have better outcomes. Managed accounts represent one such potential option.

A managed account can be defined as a customized discretionary portfolio managed for a defined contribution (DC) plan participant that can include services to help identify optimal savings rates and help with retirement planning. Managed account providers generally include online technology in delivering institutional-quality asset allocation to DC plan participants and they are held to an Employee Retirement Income Security Act (ERISA) 3(21) and/or 3(38) fiduciary standard.

In a recent series of white papers, DCIIA explores various aspects of managed accounts in detail, including the factors to consider when determining if they are right for a particular DC plan, such as:

Do they align with the plan’s goals?

Like any change being contemplated by a plan sponsor, managed accounts should align with the overall goals of the plan. Managed account services may assist participants with identifying more optimal savings rates and appropriate asset allocation and may help with retirement planning. Considering managed account services alongside other qualified default investment alternatives (QDIAs) can be a useful practice in better understanding the various paths to achieving the plan’s goals and objectives.

Do they make sense for the employee demographic profile?

To help gauge the potential benefits of a managed account service, plan sponsors should examine the demographics of their participant base. A relatively simple place to start is to look at participants’ age distribution. The common wisdom is that participants approaching retirement stand to benefit more from a managed account program than younger participants with less wealth, a longer active contribution period and a primary goal of accumulation.

Other factors include whether participants using the service are likely to realize its full value—will they maintain ongoing engagement with it and will they benefit from the customization features, which come at a cost? (This report from Morningstar explores which participants may be most likely to benefit from managed accounts.)

What are the implications for the investment menu?

A managed account service typically uses the investment options available on a plan’s core menu. It is important to understand how a managed account provider’s asset allocation philosophy and approach will use these options. This is particularly important when the managed account service is implemented as the plan’s QDIA.

Because the usage of investment options is at the discretion of the managed account provider, it is possible for a managed account provider to only use a subset of the investment menu. What the managed account provider offers participants depends on how it views and models the plan’s investment options. Managed account providers can also use investment options that may not be on the core menu, but have been added to the plan for use by only the managed account provider.

What are the cost and operational considerations?

Managed accounts typically carry a service fee that is incremental to the fees of the individual fund options in the plan. Fiduciaries are responsible for evaluating and determining if the fees that participants pay from plan assets are both reasonable for their value as well as compliant with ERISA, as it relates to paying for additional plan services.

Since programs are priced differently, plan sponsors should understand how fees are structured, and how favorable or unfavorable a fee structure is, based on the demographics of their participants. A plan sponsor also should understand the potential cost of an opt-in versus an opt-out structure.

Operational aspects are also a key consideration if a plan sponsor is at the point of evaluating managed account service providers. Operational focus points include: recordkeeper connectivity, portal integration, portability, security, privacy and the integration timeline.

How will we measure success?

It is important to understand the appropriate criteria for measuring the effectiveness of managed accounts, which are investment services rather than investment funds. Some metrics that are generally used when evaluating investment fund providers are available, but not all of them are relevant. Because managed accounts are a service with an incremental fee, additional factors concerning their usage and incremental value provided are particularly important.

Cerulli Associates has noted that a “growing emphasis on financial wellness, concerns about lack of retirement income options within employer-sponsored plans, increasing customization for the participant and fiduciary concerns could spur additional growth in managed accounts.”

Indeed, managed accounts may have the potential to add value across a number of dimensions, but they also bring an additional layer of costs to the participant. Plan sponsors should therefore carefully consider whether a managed account program is suitable for their plan and its participants, and, if desirable, should prudently select a managed account provider, all while working with their investment consultant, recordkeeper and ERISA counsel (if applicable). Plan sponsors should also consider the impact of the various implementation options and of the required monitoring of the service.


Peg Knox is the chief operating officer (COO) of the Defined Contribution Institutional Investment Association (DCIIA) and is a former plan sponsor. Additional resources on this topic are available in DCIIA’s online Resource Library.

This feature is to provide general information only, does not constitute legal or tax advice, and cannot be used or substituted for legal or tax advice. Any opinions of the author do not necessarily reflect the stance of Institutional Shareholder Services or its affiliates.