Which Metrics Best Define Success in Managed Accounts?

Investment performance isn’t everything, and that’s especially the case with managed accounts. While target-date funds are typically assessed on their performance relative to a benchmark, managed accounts—which use salary, savings rates and additional data to develop a personalized retirement strategy—need to prove they are worth their extra cost.

“Not all managed accounts are created equal,” says Jeff Ziemba, senior vice president and financial adviser at D.A. Davidson & Co. Factors such as the cost differences, investment philosophies and how the solutions use participant data all matter. “Just like with everything else in a retirement plan, there has to be a thesis for, ‘Here’s the solution I’m evaluating, why I would add it or not add it, and what is in the best interest of my people?’”

Plan-By-Plan Assessments

Because the goal of managed accounts is customization, plan advisers can convey to sponsors that the first step to determining success is understanding workforce needs.

“The better a sponsor knows its participants, the better equipped they are to introduce services and solutions,” says Drew Maresca, vice president of research for the Defined Contribution Institutional Investment Association’s Retirement Research Center. He says employers could find potential answers through workforce demographics or directly surveying employees about their interest in financial services.

Another major consideration is the type of assets to be made available. Some workforces have enough “sufficiently sophisticated participants” to warrant the inclusion of non-core assets, Maresca says, which might include offerings such as private market securities and retirement income solutions. Other plans might decide that non-core assets are not in their employees’ best interest, even if they are delivered in a managed account.

“Every plan has to make the decision that’s best for their specific workforce, and it’s really hard to boil that down to one or two metrics that represent success,” Maresca says. “That varies plan to plan, participant to participant.”

Metrics That Matter

Common metrics that sponsors and advisers can use to assess managed accounts include projected participant outcomes such as savings behavior, retirement readiness, financial wellness and income replacement.

Kerr McGowan, chief product officer at Stadion Money Management, says those evaluating managed accounts should remember that, unlike target-date funds, they are measuring a service, rather than a fund.

“While performance is a big piece, … [answering] ‘Is this working?’ is a multifaceted approach,” McGowan says.

Managed accounts aim to offer participants a personalized plan for achieving their financial goals up to and through retirement, so Laurie Lombardo, senior vice president and head of retirement at Voya Financial, says a top metric to measure is how personalized the allocations are.

Other factors that can be used to reflect quality of investment service through managed accounts can include:

• Participants remaining invested during market volatility;
• Participants being educated on their options;
• Percentage of unique portfolios; and
• Portfolios’ allotments, such as equities compared with standard target-date funds.

From a plan perspective, Lombardo says plan administrators should consider whether participants can alter their portfolio depending on risk preference, as well as age. Can two participants in the same age cohort be in different asset allocations based on their financial circumstances? If not, Lombardo says the participants may not be getting the personalization that managed accounts promise.

Saving Rates

Another important measure to consider when assessing the success of managed accounts is underlying saving rates. Managed accounts should offer a more customized investment strategy that may or may not deliver better returns than a target-date solution, and participants may be encouraged to save more due to regular meetings with a professional, but those advantages could be undone by low saving rates.

“If I’m still saving below 10% to 15% of pay, we would argue, does it matter?” Ziemba says. “Is the juice worth the squeeze for that extra cost?”

McGowan says there must be participant education about contribution rates. Some providers, including Stadion, offer outlook projections to participants, such as what might happen if an employee went from a 3% contribution rate to 5%.

“You can pair the positives of a better asset allocation that will hopefully have more appropriate long-term performance … along with the fact that you’re contributing more,” McGowan says.

Research shows that managed accounts could lead to higher saving rates. Morningstar recently found that managed account users generally contribute more than nonusers and are more likely to get their full employer match.