Managed Accounts Evolving in DC Space

Providers are enhancing managed accounts with new features and are seeking to maximize the benefits of these solutions in order to outweigh their costs. 

By Javier Simon | May 10, 2017
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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.

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