Can Managed Accounts Help Solve Decumulation?

Retirement plan participants, in accumulation, have the goal of building wealth over decades. Decumulation, however, requires a series of highly individualized decisions about withdrawals, taxes, guaranteed income, longevity risk and household finances.

“The decumulation side is so much more challenging,” says Stephen Welch, managing partner in Crownmark Wealth Advisors. “Climbing up the tree is easy. Climbing down the tree—that’s where the challenges are.”

Some industry experts say managed accounts can provide guidance during the decumulation stage, as the accounts can incorporate individual participant data and can offer personalized guidance about spending, withdrawals and income generation.

Timothy Pitney, head of lifetime income distribution at TIAA, says managed-account structures can accommodate broader investment choices and a wider range of retirement income products than can traditional investment vehicles, including fixed annuities, variable annuities and other guaranteed income solutions.

“You can have more of a drawdown strategy designed into those managed accounts, [accounting for] demographics, spending needs and how much they need to pay for basic expenses,” Pitney says.

Gathering Information

The key advantage of managed accounts is personalization, according to Robert Crothers, TIAA’s head of business development and product implementation. However, he says personalization depends heavily on participant engagement and complete information. Participants must provide data about their finances and goals for recommendations to be effective.

Many managed account providers tout their ability to personalize based on payroll and employer data. An August survey from the Defined Contribution Institutional Investment Association quoted providers as viewing managed accounts as a “financial plan” and a key benefit for participants making major financial life decisions. In turn, the interviewed providers noted that participants enrolled in managed accounts often contributed more than those who did not use the service,

“[Managed accounts] should ask for much more specific information about that [participant], where they are currently in their savings years, where they’re trying to get to,” says Kyle Harris, a senior plan consultant at Two West Advisors. “With that, it should give a tailored allocation, specific to them, that should meet their time horizon, their savings goals.”

However, Welsh argues that many existing managed-account programs do not go far enough in addressing the realities of retirement spending. While many solutions incorporate data such as age and income, retirement readiness often depends on many more factors, such as taxes, Social Security claiming decisions, healthcare costs, required minimum distributions and income sources outside the workplace plan.

“Retirement is not an age; it is a state of financial condition,” Welch says. “You can have two 65-year-olds with completely different lifestyles, completely different balances. One might be very ready to retire. The other may not be.”

A frequent oversight with managed accounts, according to Welch, is that retirement decisions are typically made at the household level, while many managed accounts focus primarily on individual participants. Factors such as a spouse’s income, age difference, retirement timeline, tax situation and longevity expectations are often excluded from the analysis. 

“We really need to explore the entire body of that participant,” Welch says. “What’s their longevity risk? What’s their lifestyle? What’s their tax strategy?”

Harris says if participants fail to update information about income, savings rates or life changes, resulting recommendations from managed accounts can easily become outdated.

“I’m not going to meet with you each year and gloss over whatever we put into a system 10 years ago,” Harris says. “You have to manage these inputs over time to make sure that the managed account is actually operating as we want it to. [Otherwise] it starts to go from a robo-adviser that can work to this subscription that people don’t even realize they have.”

Justifying the Cost

Experts say fees are an important factor when determining whether managed accounts deliver measurable improvements in participant outcomes or simply replicate existing investment solutions for a potential higher cost. A Morningstar analysis of more than 7,000 funds published in January found that managed account investors paid an average of 71 basis points in total fees—31 bps in fund fees, plus an additional 40 bps in service fees.

Welch warns that if participants lack financial education or engagement and take a hands-off, “set it and forget it” approach, managed accounts can become “almost like a crutch,” akin to investing in target-date funds. He remembers reviewing one participant’s managed account and finding that roughly 40% of the portfolio’s performance appeared to come from a TDF already available in the plan.

“The participant would have done even better being just in a simple TDF, despite the participant also paying managed-account fees,” Welch says.

Conversely, Harris is concerned that participants may not fully understand what a managed account is, what service they are receiving or what fees they may be paying when they enroll. Instead, many may simply trust the provider’s recommendation without evaluating the service themselves.

“People get the pop-up that says, ‘Hey, do you want help choosing this?’ … They click it … but I don’t think they actually know what they’re doing,” Harris says. “They’re trusting the provider [and] the tools.”

Experts say managed accounts work best in conjunction with conversations with financial professionals, to better assess retirement goals, tax strategies, household finances and income needs.

“Sometimes it gets presented like an either/or, like ‘managed advice or target-date funds’ or ‘managed advice or financial planning.’ … I think it’s a ‘Yes, and,’” Crothers says. “The managed account gives you a degree of personalization and the ability to bridge that into an advice conversation so that you’re not doing it on your own.”