Fiduciary Concerns When Considering Managed Accounts

Managed accounts offers unique personalization catered to a participant’s needs, but are the possible fiduciary mishaps worth implementing the product?

Managed accounts are best known for their superior customization and personalization, making them an attractive option for those searching to cater their retirement portfolios based on personal circumstances. Yet, while much focus is placed on its heightened fees in comparison to other investment products, plan sponsors should note one other concern: fiduciary considerations.

In terms with both plan and participant fees, sponsors must ensure reasonable costs relative to services rendered, according to an article by Cammack Retirement. If not, employers may risk throwing themselves into a fiduciary debacle.

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Todd Lacey, chief business development officer at Stadion Money Management, explains how rapid fees associated with managed accounts can climb.

“Sometimes it comes from how they’re built. So, managed accounts that use the funds in the plan, if you take the funds in the plan and then you add an additional management fee on top of those, in order to manage the account portfolio, that can add up pretty quickly,” he says.

To combat these added fees, Mike Volo, senior partner at Cammack, suggests offering the managed account on a voluntary basis, rather than a qualified default investment alternative (QDIA) or another default option. Whereas a QDIA will automatically enroll a participant into the managed account, holding a managed account as a voluntary selection results in reduced fees for both the plan and the participant. Instead of defaulting participants into a managed account, sponsors can apply target-date funds (TDFs)—an investment alternative with lower prices but decreased personalization—as the QDIA. Then, should a participant choose to enroll in a managed account, the TDF can be reassigned.  

“An emerging solution is to default participants into a target-date fund and then based upon a trigger, either account balance or age, then that TDF is then transferred to a managed account, which will increase utilization,” he says.

As an alternative solution, Stadion Money Management offers Storyline, an investment feature focused on small plans and amplified personalization—including personal risk profiles, expectations, and goals—that applies collective investment trusts (CITs) and exchange-traded funds (ETFs) to drive prices down.

Next: The right recordkeeper with quality investment options


Also a fiduciary concern, plan sponsors should be wary of selecting a provider with only one investment option for participants. Otherwise, both Lacey and Volo note, employers may come under fire for failing to create an appropriate portfolio model for participants.

“It’s important that plan sponsors need to really understand what the participant experience is going to be, and understand what communications and how the participants are going to act with the managed account provider,” Volo says.

Adding fuel to the fire, recordkeepers may not offer a slew of managed account options, unlike normally provided in TDFs. However, this depends on the plan provider, according to Lacey.

“Depending on who’s recordkeeping your plan, there may be no managed account option available, to five or more managed account options available,” he says. “So, in some cases the plan sponsors and advisers may not have a lot of choice.”

Yet, that doesn’t mean that managed accounts won’t see more options in the future. Lacey points out how in the past, only limited target-date fund options were available when first introduced. Today, recordkeepers regularly offer multiple funds.

“So a plan sponsor, if they were with a certain recordkeeper, they would have only one target date,” he says. “And now, that’s fairly rare. Regardless of recordkeeper, plan sponsors generally have a number of TDFs to choose from. That’s probably the direction the managed account industry may move as this kind of segment matures.”

Either way, after plan sponsors understand the number of investment funds recordkeepers will provide, Lacey suggests this is the right moment for employers to explore logistics, including underlying investments, costs and more.

“They’d want to look under the hood to see what are the underlying investments used—are they the plan funds or are there other investments? What’s the cost, and what’s the participant experience associated with that managed account. And then finally, should they offer it as a choice, as an opt-in option for participants, or do they want to make it their default fund and actually default people into the managed account,” he says.

According to the Cammack report, plan sponsors will also need to measure if there are enough active and passive funds in the current investment lineup. Otherwise, as the report reads, “an investment lineup would require an overhaul before the addition of managed accounts can be considered.”

Next: Unclear benchmarking in managed accounts  

Due to the increased customization found in managed accounts, ranging from age, marital status and more, performance reporting and benchmarking are noted as cons against the investment product. According to the Cammack report, whereas TDFs and mutual funds can apply a standard benchmark, managed accounts are heavily personalized, making comparison purposes tougher for each participant.

While a fiduciary concern for plan sponsors, employers can find other measures to show proper due diligence, says Volo. Requests for proposals (RFPs), questionnaires concerning fees, investment methodology, and participation communications regarding accounts and levels of engagement can gather insight to ultimately reach expectations and goals.

“Understanding how managed accounts are being developed, how the information is being used, and how they’re using different variables like risk, family information, outside assets, etc.,” Volo says. “Oftentimes I find the managed account providers have a significant amount of data, based on their experience in managing accounts that is helpful in doing the due diligence for a plan sponsor.”

Next: Importance in educating participants

Along with all other retirement and investment features, strategies, and tools, participant education in managed accounts remains integral, and although the idea of managed accounts clicks to advisers and recordkeepers, for participants, that’s not the case.

“The bright side has been greater transparency and more information to plan participants, but the downside has been that’s more information for participants to digest, and they’re overwhelmed,” says Volo.

To avoid stressing participants with a staggering amount of information, Lacey recommends two solutions: integrating technology and one-on-one help; and keeping it clear.

“You have to keep it very simple, the managed account provider has to work very closely with the advisers and the plan sponsors, and they have to blend technology and human support to really try to get people where they’re comfortable and enrolled in the managed account,” he says.  

If plan sponsors do add a managed account as a QDIA or as another default option and find participants are not willing to add information regarding risk tolerance or personal situations, Volo proposes choosing a TDF instead to avoid paying added fees—which could then result in a fiduciary concern.

“If they’re not willing to spend a little time and provide some personal information regarding their risk tolerance and personal situation, they may be better off in a target-date fund,” he says. Because otherwise, the managed account is defaulting based upon a retirement date, but they’re paying an additional fee for that.

However, Lacey warns of possible volatility when turning to TDFs, since the personalized information can be too broad.

“One of the challenges with some of the TDFs is that based on someone’s age, it puts them into a portfolio that might be too volatile for them, and therefore they’re tendencies to sort of bail out when their account goes down, based on market volatility, is high,” he says.

Ultimately, the deciding factor concerning managed accounts depends on what a participant feels better secured with, and what provides the best outcomes.

Lacey says, “so much of managed accounts is getting investors to a portfolio that they’re comfortable with, that makes sense for them, that’s going to have a level of volatility that they’re comfortable with—based on their risk profile.”

Measuring Retirement Readiness Key to Clients’ Workforce Management

Waiting until a plan sponsor sees that employees are not retiring on time is too late to manage the pipeline of talent, and having employees unexpectedly retire early can cause disruption to business units or divisions and to talent transitions.

“There are numerous reasons why employees today are commonly working to older ages than in the past: people are living longer, they are healthier, and advances in technology have eliminated many barriers to continued employment,” states an Insights and Strategies publication from Sibson Consulting.

It continues, “However, organizations that understand their employees’ retirement situations are better equipped to predict and address problems that could alter the natural progression of the workforce. One such problem could be a potentially less-productive portion of the workforce made up of employees who would like to retire but who are not yet financially prepared to do so. Another problem could be skill gaps that occur if employees retire earlier than expected.”

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Jonathan Price, Sibson Consulting vice president and consulting actuary in New York City, notes that if Baby Boomers are not ready to retire on time, it hurts the younger generations’ career progression. “Younger generations may not wait—they may leave or become unengaged,” he says. In addition, the Sibson publication says, employees unable to retire on time may consume a disproportionate share of the organization’s resources in the form of higher salaries and benefits.

According to Price, when plan sponsors look at retirement readiness, the conventional wisdom is just to confirm they are ready to retire on time, but they need to also consider if employees are ready to retire earlier than the employer expects. “If employers are unaware of employees’ early retirement, it can create gaps in knowledge and disruption to business units or divisions and to talent transitions. The costs of rectifying after the fact are high,” he says.

A Willis Towers Watson survey found that among employers that offer both a defined contribution (DC) and a defined benefit (DB) plan, 39% view their employees’ retirement readiness as a current business risk, and 44% project that it will be a risk within two years.

Measuring retirement readiness

Price says there is a spectrum of measuring retirement readiness, from anecdotal to calculations. However, waiting until a plan sponsor sees that employees are not retiring on time is too late to manage the pipeline of talent, so plan sponsors need to incrementally address this as employees approach retirement.

Retirement plan providers offer many tools or calculators to measure employee retirement readiness. According to Price, some measure income replacement ratios, while some measure a wealth accumulation factor—which is a participant’s account balance divided by pay.

The Congressional Budget Office (CBO) noted in a report that although a common rule of thumb is that replacing at least 70% of gross preretirement income would avoid a marked decline in retirees’ standard of living, that specific goal is not appropriate for all people. To better capture the diversity of people’s circumstances, researchers have developed a range of target rates that vary with individual characteristics, such as marital status, lifetime income, and homeownership. In addition, without the ability to adjust factors used in replacement rate planning tools, workers may over- or under-estimate how much they need to save for retirement, the Government Accountability Office (GAO) concluded in a report.

According to Price, one can find advantages and pitfalls of each type of numerical factor. Sibson has a grading system that reflects expected retirement readiness, which could be a replacement ratio, but also factors in uncertainty—what is the probability of getting there? “For example, for a 45-year-old, there is some probability of having an 80% replacement ratio at age 65, but what is the variability of possible outcomes? An employee may have a range of 75% to 85%, but also a range of 40% to 90%. Employers need to know that,” he says. “They need to know: What is the expected replacement ratio; what is the likelihood of attaining that; and what is the variability of outcomes.”

Some providers and industry representatives are creating retirement readiness measures that factor in the likelihood of attaining retirement readiness—looking at changes participants may make in their working lives and savings habits.

Christine (Chris) Lange, SVP, digital solutions, retirement at Voya Financial, based in Windsor, Connecticut, says translating retirement plan participant balances plus future contributions and outside assets into how much monthly income they are going to have to sustain them for life so they can retire has been very successful. “We’ve found that when participants see this they are inclined to take action because they realize they are not only increasing their balances but purchasing future income so they can retire,” she says.

Voya rolled that up for plan sponsors so they can see through data visualization where their employees stand in terms of their ability to retire. “Sponsors can see who is on track and who is not. It allows them to do targeted messages and work with certain employees,” she notes.

Although Voya’s tool defaults to a specific retirement income replacement rate, the participant and the plan sponsor can change it. “Everything the participant does is shown in the context of how it affects retirement income—the impact of participating, taking a loan, etc.,” she says.

Helping participants get to retirement readiness

Tom Armstrong, VP, customer analytics and insights at Voya Financial, based in Braintree, Massachusetts, says not only do plan sponsors want to know employees’ retirement readiness, it is helpful for them to understand how participants get there—what are the key things influencing how participants are getting there?

Lange adds that replacement income may be a primary measure of retirement readiness, but financial wellness and employee engagement are important, especially in helping employees make decisions.

Armstrong says the Voya Behavioral Finance Institute for Innovation has done a decision style analysis of participants and found that those who are more reflective have better outcomes. “We packaged those findings to provide plan sponsors information about how plan participants are making decisions—their decision styles and how plan design changes can improve their ability to retire. “Our research solidifies that when we get participants to make decisions in a digital way, it can determine if they are reflective in their decisions,” he says.

For example, according to Armstrong, if a participant is moving a slider in the retirement readiness tool to increase or decrease their savings rate, they are immediately using reflective thinking to see how saving more would help. Many are using this to move their retirement date earlier. Voya provides to plan sponsors how participants are engaging in these tools to improve outcomes.

Lange says this all ties into workforce management. If an employee plans to retire earlier and the employer wants to retain them, that is something the employer should address. If employees are retiring too late, it makes employers more keen on making sure employees are ready to retire and can make a choice when to retire.

Price points out it is important for plan sponsors to realize this is not something they wait until an employee is retirement age to consider. “Employees need to know how to manage retirement readiness themselves. Employers need to be able to communicate to Millennials and Generation X what actions they need to take now to improve their retirement readiness,” he says.

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