Products February 12, 2024

EFE Sees Managed Account Assets Hit $210B

The managed account provider for 45% of the market also notes improved user engagement.
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Edelman Financial Engines’ managed account assets grew to $210 billion by the end of 2023, up from $88.2 billion in 2013, according to a Monday announcement.

In its report, EFE highlighted its 45% market penetration for DC managed account assets through the fourth quarter of 2023, according to data from consultancy Cerulli Associates. The Santa Clara, California-based firm also noted that it has been the largest provider of managed accounts to defined contribution plans since 2008, partnering with large employers and recordkeepers to offer its plan advice and management to 1.2 million workplace plan participants.

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Financial Engines started offering managed accounts to participants in 2004, according to the announcement. The firm was purchased in 2018 by private equity firm Hellman & Friedman, which had a majority stake in Edelman Financial Services; the company rebranded later that year to become Edelman Financial Engines.

Twenty years from inception, the overall DC asset base for managed accounts at about $434.57 billion, having grown from about $170 billion 10 years ago, according to Cerulli. Other providers include Morningstar Inc., Fidelity Investments and Stadion Money Management, which is owned by Smart.

“Twenty years ago, as the 401(k) continued to replace traditional pension plans as the primary employer-sponsored retirement program, we saw an opportunity to step in and offer sophisticated financial advice to employees who typically didn’t have access to independent and personalized investment management,” said Kelly O’Donnell, president of employer services at Edelman Financial Engines, in a statement. “It’s incredible to see how the industry has progressed and innovated since then.”

Improved Savings

EFE’s data show that, over the past 10 years, savings rates of managed account users average higher than that of non-users; the firm notes the personalized management and advice of managed accounts as leading to the better outcomes.

According to EFE client data, users contribute an average of 9.1% of income to their account, as compared to 7.8% for non-users and 7.1% for individuals primarily invested in a single target-date fund.

Managed account members also have a greater chance of keeping their assets in plan than rolling them out. According to data from recordkeeper Alight Solutions, which offers EFE-managed accounts, plan participants using managed accounts were 3.1 times more likely than non-users to keep their assets in-plan after leaving a company. Meanwhile, users were 3.4 times less likely than non-users to take a cash distribution when leaving a company.

EFE noted that it has performed almost 150 million portfolio reviews since it started offering managed accounts.

Availability vs. Uptake

Managed accounts are available to many participants through their employers. In a survey of 2,128 plan sponsors, 37.7% said they are offering managed accounts to their participants, according to PLANSPONSOR’s 2024 Defined Contribution Benchmarking Report. That compares with 33.2% of plan sponsors that said they offered them in 2018. Meanwhile, recordkeepers as recently as this week have been bringing to market hybrid, or dynamic, qualified default investment alternatives that automatically transition a participant from a TDF into a managed account when they are further along in their career and closer to retirement age.

Total assets in DC plans were $7.98 trillion at the end of 2022, according to the board of governors of the Federal Reserve System, and the top 10 target-date funds in DC plans accounted for $1.74 trillion in assets at the end of 2023, according to Simfund, which, like PLANADVISER, is owned by ISS STOXX. Meanwhile, managed account assets have grown among the top-nine DC sponsors to $434.57 billion through 2023 after being at $316.66 billion in Q2 2019, according to Cerulli, who compares to that year due to volatile markets in 2021 and 2022 influencing assets.

Some stumbling blocks to uptake, according to both advisers and industry reports, are the fees associated with managed accounts and the threat of litigation from putting participants in relatively higher-fee options, as compared with TDFs. Analysis from an-oft cited  2020 Aon white paper found that the asset allocation from a managed account does not outperform a TDF when taking fees into account.

Proponents of managed accounts have noted that the personalized service and customization will ultimately make up for associated fees. Data and analytics firm Fiduciary Decisions last year launched a new benchmarking system for managed accounts to help plan fiduciaries compare managed account offerings against peers, as well as TDF offerings. The firm noted at the time that the service will help advisers and plan sponsors address fiduciary concerns about offering a managed account rather than a lower-cost option.

EFE noted in its report that employer and employee demand for more financial advice and products for the workforce have grown over the years, including access to retirement income offerings that can be provided through managed accounts.

The firm has seen an uptick in managed account users providing more personal data and preferences to improve customization and results. Those inputs include retirement age, risk preferences and outside investment accounts.

“We are proud of the positive impact that we have made on employees over the last two decades,” O’Donnell said in her statement. “However, like many other aspects of the overall defined contribution system, we know there is much more to do to help even more employees improve their retirement and financial well-being. Looking ahead to the next 20 years, we expect continued change as advancements and new technologies such as artificial intelligence take hold.”

Products February 1, 2024

Managed Accounts: Past & Present

The more personalized investing options for retirement plans have been around for two decades. Will they finally take off?
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Managed accounts have been a defined contribution plan option for more than 20 years.

Wilshire Advisors LLC’s November 2023 report, “The Future of DC: Personalized Investing,” noted that the Department of Labor’s 2001 advisory opinion on SunAmerica’s plan offering was “a transformative event” that clarified the use of customized portfolios for participants. The Pension Protection Act of 2006 provided subsequent validation by allowing managed accounts to serve as plans’ qualified default investment alternative.

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These favorable rulings led to the greater availability of managed accounts in plans. Vanguard’’s “How America Saves 2023” report found that 77% of plans offered managed accounts in 2022, up from 57% in 2018.

Elizabeth Chiffer, a retirement analyst at Cerulli Associates in Boston, says the nine largest defined contribution managed account sponsors reported assets of $434.6 billion in the second quarter of 2023, an increase from $316.7 billion in 2022’’s second quarter. The three largest DC managed account sponsors, according to Cerulli’s leaderboard, are Edelman Financial Engines, Morningstar and Fidelity.

Managed accounts’ proponents maintain that the accounts have several advantages over target-date funds. Todd Lacey, chief revenue officer with Stadion Money Management, which is owned by Smart Pension Ltd., in Watkinsville, Georgia, says that while TDFs generally base portfolio allocations solely on estimated retirement ages, managed accounts’ investments can be customized for a participant’s individual risk tolerance, non-plan account balances and other factors.

Direct return comparisons for managed accounts versus TDFs can be hard to come by, in part because providers note that managed accounts go beyond returns to providing specific suggestions and needs for the participant’s specific situation. That said, Alight issued research showing a 10-year analysis from  2007 to 2016 found that returns for participants using a managed account were 0.27% higher, net of fees, per year than for people that did not use them.

Nonetheless, participants have not flocked to managed accounts. Vanguard reported that the overall percentage of participants using the accounts has increased slowly, from 4% in 2014 to 8% in 2018 and 9% in 2022.

The Wilshire report highlights several factors for the accounts’ low usage versus target date funds. These include: higher fees charged to defaulted participants when compared to TDFs, the fiduciary risk for advisers and sponsors in making them a default in plan design and a lack of robust advice for the decumulation phase. Wilshire analysts, however, believe there has been progress in addressing these issues for managed accounts in recent years, predicting as high as an 80% adoption rate of the vehicle among plan sponsors by 2030.

“We believe the market share of plan assets will increase as pricing differentials relative to TDFs compress and as participant populations age, increasing the need for advice,” the report stated.

The Price Hurdle

Steve McCoy, the CEO and chief compliance officer of iJoin in Scottsdale, Arizona, says early managed account providers’ service models and cost structures led to relatively high fees. The providers could not fully leverage technology and automation, resulting in service models that involved more one-on-one client participant consultations, meaning more costs for staffing and administration.

McCoy cites Morningstar as pioneering the use of technology and furthering solutions that enhanced advisers’ value proposition when using the accounts with automated wealth management that adjusts depending on participant inputs. Advances in this plan-related technology have, in turn, helped reduce fees, McCoy notes.

Tom Kmak, the CEO of Tigard, Oregon-based Fiduciary Decisions, agrees that pricing is an obstacle. Kmak says sponsors have been reluctant to default a participant into an advice program that in the past would might have charged as much as 100 basis points, or 1% of assets. Kmak emphasizes, however, that managed accounts’ fees have declined: “The pricing has definitely come down; our data has shown that without a doubt.”

These days, Lacey says managed accounts’ fees typically range from 0.1% to 0.7% of assets. Pricing strategies can differ, he explains. Some providers charge one fee across all participant balances that are in a managed account, while others charge a per-participant rate based on each account’s assets. Others charge a fixed-dollar minimum fee or a fixed per-participant fee.

In terms of suboptimal engagement, expanded data availability and improved data integration are potential solutions. Lacey says Stadion works with about 15 recordkeepers, and the firm’s technology team has built direct integration into the recordkeepers’ platforms. The result is that Stadion receives participants’ data daily to construct portfolios.

“Twenty-five years ago, it was a bit more rudimentary,” Lacey explains. “You didn’t have as sophisticated technology integrations. Because of that technology development and recordkeeping capabilities, you’re now seeing more data points, more personalization, more sophistication within managed accounts.”

Lacey says the combination of lower fees and increased data availability from recordkeeping systems address some of the traditional adoption hurdles and make managed accounts more attractive QDIA options. “Without a participant engaging at all, based on the data we get, we can auto-personalize for a participant at a very reasonable price,” he says.

Looking Ahead

Sources and industry analysts expect greater managed account adoption for several reasons. Wilshire noted, “Comprehensive advice is a key differentiator of managed accounts, helping participants know how much to save, how to invest, when to retire, how much to spend and from which accounts.”

McCoy says  a focus on retirement income will boost managed accounts.

“Guaranteed plan income is a trend that’s accelerating in our industry,” he says. “A lot of managed account solutions that you will continue to see come to market will have the option to include an allocation to a guaranteed in-plan annuity or income solution.”

Delivering personalized advice to participants dovetails with the growth in adviser-managed accounts as a business model. Wilshire, in its DC report, maintained this transition will “amplify the role and value of the advisor, who will increasingly provide advice not just at the plan, but also [the] participant level.”

AMAs will also expand client service opportunities, according to Wilshire, including “comprehensive financial planning services, financial wellness offerings and advice with respect to insurance products, including whether to purchase life, disability, and especially longevity insurance.”

The ability to benchmark managed accounts is another positive development for managed account proponents. It was always possible to compare accounts’ fees, but considering price alone overlooked plans’ additional features. In November 2023, Fiduciary Decisions announced the development of a new report that benchmarks more comprehensive metrics for DC-plan-managed accounts. In addition to pricing, the report evaluates account provider quality, services, participant success measures and engagement, and extra services.

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