Nuts & Bolts: Managed Accounts vs. Adviser-Managed Accounts

Managed accounts and adviser-managed accounts are often discussed as distinct offerings in defined contribution plans. While the two approaches differ in how portfolios are constructed and who exercises investment discretion, industry experts say participants generally receive the same core benefit: a personalized retirement strategy tailored to their financial circumstances.

Under the Department of Labor’s definition of a qualified default investment alternative for a retirement plan, a managed account is an investment management service, as defined by the Employee Retirement Income Security Act.

As specified by the regulation, investment decisions may be directed by a 3(38) investment manager, trustee or other plan fiduciary. In practice, however, plan sponsors more commonly select and oversee managed-account providers rather than directly manage participant investments.

Definitions and Contrasts

By the DOL definition, managed accounts must be diversified to minimize the risk of large losses and must change their asset allocations and associated risk levels for an individual account over time, with the objective of becoming more conservative as a participant ages. 

As managed account adoption increases and providers add features such as retirement income planning, guaranteed income solutions and personalized savings recommendations, the terminology surrounding the offerings has become increasingly blurred.

Adviser-managed accounts do not necessarily mean participants receive more advice or work directly with a financial adviser. The distinction between ‘managed’ and ‘adviser-managed’ generally refers to who designs and manages the investment portfolios underlying the managed account program.

In a traditional managed account, a provider such as Morningstar typically serves as the discretionary 3(38) investment manager and creates portfolio recommendations. In an adviser-managed account, the plan’s investment adviser generally develops the model portfolios the managed account provider uses to implement participant recommendations.

At their core, managed accounts and adviser-managed accounts seek to solve the same challenge: providing participants with personalized retirement guidance that goes beyond age-based investing. However, adviser-managed accounts generally give a plan’s adviser a larger role in designing and managing the underlying portfolios, while traditional managed accounts place those responsibilities with the managed account provider.

Unlike target-date funds, which generally place participants of similar ages into the same asset allocation, managed account programs incorporate individual factors such as savings rates, account balances, marital status, outside assets and retirement goals. The result is a customized portfolio and financial plan designed around a participant’s specific circumstances.

“A managed account takes into account what’s your age, but it also takes into account how much are you saving, what’s your account balance, where do you live, are you married,” says Geoff Keeling, managing director and head of retirement investment solutions at Wealthspire. “Based on this more robust dataset, we can get you into a more customized portfolio.”

Personalization as Common Thread

Both types of accounts can customize portfolios for plan participants.

Keeling and Julie Varga, senior vice president and investment and product specialist at Morningstar Investment Management, emphasize that personalization, rather than adviser involvement, is the defining feature of modern managed accounts.

One major similarity between the two types of accounts is the guidance and recommendations available to participants, such as for savings rates and Social Security.

“Ultimately it’s the same service,” says Varga. “It’s giving the participant the exact same type of recommendations again the investment recommendation [and] the savings rate [recommendation].”

Keeling also cites savings rate recommendations as one of the common and useful tools available through both kinds of managed accounts.

“When you engage with a managed account service, the participant will put in their data … and the managed account will say, ‘You’re not on track to retire. You need to actually increase your savings and start saving more to get you on track,’” he says. “Some studies show that participants that are in managed account services have higher savings rates, because they have that advice pushed along.”

Social Security recommendations work similarly, with the data in managed accounts helping detemine when participants should start claiming benefits.

“Managed accounts are typically going to pull in data about each individual person … in order to provide a recommendation around how they should be investing in their 401(k) plan, as well as how much they should be saving, when they should potentially retire, when they should take Social Security [and] how to draw down their money once they reach those retirement years,” says Varga. “It’s a whole bunch of different factors that make it kind of similar to sitting down with a financial planner.”

Varga says that this advice is consistent across both types of accounts, and that the difference lies in who or what controls data collection and management within the accounts.

Who’s Got Oversight?

In a traditional managed account, Varga says Morningstar serves as the discretionary manager and is responsible for the portfolio recommendations and fiduciary oversight.

In an adviser-managed account, Morningstar retains responsibility for determining a participant’s recommended risk level and savings strategy, but the plan’s adviser develops the model portfolios used to implement those recommendations.

For Voya Financial’s managed account offering, access to a human adviser is optional, allowing participants to receive recommendations through digital tools, adviser interaction or a combination of the two.

“One option is to have Voya Retirement Advisors implement personalized investment recommendations and manage their account on an ongoing basis, and that can be accomplished online, with a human adviser, or a combination of both,” wrote Chris Trovato, advisory services product director at Voya Retirement Advisors, in an email to PLANADVISER. “The investment recommendations are generated by the same engine, so the decision to interact with an adviser or not is a matter of choice.”

According to Keeling, having an adviser managed account can provide greater flexibility and increase investment options for participants.

“With adviser-managed accounts, one of the areas that there’s more flexibility is to have a non-core lineup,” he says. “You can have some different funds that may not be available to all the people in the 401(k) plan, but that can be incorporated into the adviser-managed account allocation.”

What Sponsors Should Evaluate

With both kinds of accounts, sponsors remain fiduciaries when selecting and monitoring a managed account provider, but responsibility for participant-specific recommendations is delegated to the 3(38) managed account fiduciary, whether that is the account provider or an adviser.

Keeling says plan sponsors should compare both off-the-shelf managed account offerings and adviser-managed alternatives before determining which structure best fits their participant population.

More on this topic:

	Measuring Managed Accounts’ Appeal Across Age Groups
	Can Managed Accounts Help Solve Decumulation?
	Which Metrics Best Define Success in Managed Accounts?
	More Info, More Personalization