Practice Management March 1, 2023

Inching Forward

Managed accounts remain a rare QDIA.
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Art by Alex Eben Meyer


Managed accounts haven’t made much headway as a qualified default investment alternative.

Just 4.3% of plans utilize a professionally managed account as the default investment for automatic enrollment, compared to 75.9% of plans that use target-date funds, according to the PLANSPONSOR 2023 Defined Contribution Plan Benchmarking Report. But 29% of plan sponsors surveyed say their plan includes a professionally managed account service as an investment option for plan participants.

“If participants are educated consumers (on fees and the need to engage) and they feel it’s in their best interests to go into a managed account, we’re fine with including managed accounts as an option on the menu,” says Matthew Compton, managing director of retirement solutions at New York-based Brio Benefit Consulting. “If a plan has an engaged population and some of them choose a managed account program, good for them. But for folks who are just defaulted into a plan’s QDIA, it doesn’t make a ton of sense.”

“Set It and Forget It” Mentality

Among plans that have a consultant or adviser, 52% utilize managed accounts in some capacity, according to Cerulli Associates’ U.S. Defined Contribution Distribution 2022 report, which surveyed consultants and advisers. Of that 52%, 44% of plans include managed accounts as an option on the investment menu. Only 3% incorporate managed accounts as the plan’s QDIA, with another 5% utilizing a dynamic QDIA, which defaults an automatically enrolled participant into a target-date fund and then, at a pre-determined point nearing retirement, transfers the participant into a managed account.

The usage of managed accounts as a default investment “has ticked upward slightly over the last few years,” says Shawn O’Brien, associate director and leader of the U.S. retirement research practice at Boston-based Cerulli. “Still, our data suggests only a mid-single-digit percentage of 401(k) plans offer managed accounts as the QDIA.”

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O’Brien attributes that mostly to the larger fees that managed accounts tend to have, compared to target-date funds. “For sure, the higher cost has got to be the most prohibitive factor for plan sponsors,” he says. “If you’re a fiduciary, you are going to be very conscious of the fees, particularly for a plan’s default investment. Within the context of cost, I think there’s also a concern that if participants are not engaging with the managed account, they aren’t going to get the most out of it.” To get a more customized allocation, he adds, a participant needs to engage enough to provide information such as his or her risk tolerance and outside assets.

Asked why managed accounts far more frequently appear as a menu option rather than as a default investment, O’Brien says, “It’s safer from a fiduciary perspective,” since a participant would make an active choice to invest in a managed account. “There is an argument to be made for managed accounts as an option that is mainly geared toward participants who are a little older and more affluent and who have a more complicated financial situation,” he says. “So a lot of plan sponsors think of managed accounts as having a strong value there.”

Brio Benefit Consulting does not currently have any plan clients utilizing managed accounts as a default investment, Compton says. “We’re not a believer in them as a QDIA,” he explains. “When we compare these types of programs to target-date funds, we think that, especially with the younger participant demographic—who are going to, in many cases, leave their money in the plan for decades—there is not a strong-enough reward for the extra fee.”

Compton also sees an issue with the typical lack of engagement by automatically enrolled participants placed in a default investment, which limits the customization abilities and other guidance that a managed account service can provide.

“Many participants in a default investment are looking for a ‘set it and forget it’ mentality,” he says. “If they go into a managed account program as the default and are paying an extra 25 to 50 basis points a year (compared to target-date funds), we don’t think it’s worth it. The additional expense is actually going to take away from their ultimate retirement readiness.”

Northbrook, Illinois-based Bjork Asset Management currently has no plan clients with a managed account QDIA, President Sean Bjork says. “We’ve done a lot of thinking about, ‘Hey, is this a better mousetrap?’” he says. “But we’ve yet to find any robust data set that says, ‘Yes, this is a better default investment.’”

Bjork sees a lot of promise in the customized investment allocations and personalized guidance a managed account service can provide. But he also sees considerable uncertainty in how to gauge the value of managed accounts as a QDIA, particularly in terms of ultimate outcomes such as a projected retirement income replacement.

“If we could see some well-validated research, I would be all in,” Bjork adds. “But we’re not there yet. To get there, I would need to see an outcomes study with a statistically significant data set along the lines of, ‘This is a group of 3,000 participants defaulted into a managed account solution, and here are 3,000 participants who fit the same cohort–demographics of income level, age, etc.—but they were defaulted into target-date funds. And we can quantifiably show that the folks in the managed accounts are better off by some measurable outcome, enough to make up for any higher fee structure and then some.’”

Helping Sponsors Consider It

Bjork is asked how he would respond if a sponsor came to him expressing interest in potentially switching from target-date funds to managed accounts as their plan’s default investment.

“The first thing I’d do is ask, ‘Why?’” he responds. “That would be revealing, in terms of what the sponsor is trying to accomplish. Then we can talk about, ‘What are the different ways to accomplish that goal, using the currently available tool set?’ And we’d talk about how managed accounts are one option.”

If a plan sponsor approached him about considering a possible move to managed accounts as the default investment, Compton says he would first want to make sure that the sponsor understood how managed account programs work, their fees and the participant engagement needed to optimize a managed account’s value. He would also talk with the sponsor about that organization’s employee demographics, its plan participants’ patterns of engagement versus disengagement and recent feedback about the plan the sponsor has gotten from participants.

“In some situations, an employer may have an employee demographic that is very much engaged and regularly looking for more tools and knowledge,” he says. “So maybe it makes sense to incorporate managed accounts as an option.”

Cerulli has been expecting for a few years to see managed accounts become more commonly used as a QDIA, but there has not been a significant increase in adoption yet, O’Brien says.

“Like anything else in this (retirement plan) market, that will take quite a bit of time,” he says. “But I think what we’re going to see is a noticeable increase in the use of dynamic QDIAs. Do I think that dynamic QDIAs will overtake traditional target-date funds in the next five years? Absolutely not. But I do think we’ll see a higher rate of adoption.”

Practice Management March 1, 2023

The Retirement Income Question

Can managed accounts give participants the planning help they need?
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Art by Alex Eben Meyer


There’s talk about managed accounts as a potential solution to participants’ need to plan for their retirement income.

The accounts can work well for a couple of reasons as a way to help pre-retirees and retirees with income planning, says Wei Hu, vice president of financial research at Edelman Financial Engines in Santa Clara, California. On the investment side, an Edelman managed account can be personalized to reflect how much a participant near or in retirement wants to focus on income-oriented investments versus growth, he says.

“And a managed account is really an advice program, where we’re helping people assess a lot of questions beyond ‘What is the right investment allocation for me?’” Hu says. “We’re helping people think about questions like, ‘What if I retire earlier or later than I originally planned?’ And ‘When should I start taking Social Security?’ We’re helping them develop an overall retirement income plan that factors in their particular circumstances.”

Fidelity Investments’ workplace managed account service can provide individualized help with retirement income planning and an investment portfolio that aims to meet a participant’s income needs in retirement. Using online tools and/or talking with a Fidelity staff member, participants can receive guidance to help make decisions such as at what age to retire, what is a reasonable post-employment budget, and how much they can withdraw from their account annually.

As a first step when a participant close to retirement wants to start planning for retirement income, Fidelity helps that person look at where she is now with accumulated assets and anticipated expenses, says Lorianne Pannozzo, senior vice president, workplace personalized planning and advice at Fidelity in Boston. “We talk about, ‘When do you plan to retire, and what does that retirement look like?’ And we have a retirement income conversation, really focusing on planning for essential expenses versus discretionary expenses in retirement,” she says.

Fidelity has tools to help participants model how retiring at different ages can influence how much money they are expected to have available to spend annually in retirement. “We also have data about many other individuals in similar circumstances, and we can provide a participant with [aggregate] benchmarking data on what expense level other, similar participants have in retirement,” Pannozzo says. “We can show someone data that says, ‘Here’s what the average person your age and with your circumstances might spend annually in retirement.’ Then we can discuss, ‘Do you anticipate spending more or less than that?’” Once a participant has firmed up a post-employment budget, she says, Fidelity can work with that individual to evaluate various drawdown strategies, to determine which will best provide the needed income now and into the future.

At Edelman Financial Engines, more than 130 401(k) plans now incorporate its Income Beyond Retirement solution for participants ages 55 and older, which it introduced last June. The IBR program does not have an additional fee.

IBR aims to help a participant in an Edelman managed account through the transition to an income-focused portfolio allocation, allowing for a mix of income and growth allocations, depending on the person’s retirement objectives. The program also aims to help the participant develop a personalized retirement income plan that takes into account the person’s assets and budgeted expenses. “It helps put together a plan that ultimately says, ‘Here is what the investment allocation that works best for you is, and here is how much annual spending you should be able to afford in retirement, given what you’ve told us,’” Hu says.

The program does not include a retirement income product, instead focusing on the individual’s retirement-preparation phase. It starts with what Edelman calls a Retirement Checkup, which helps a participant understand if he is on track with retirement savings and what levers he can choose from to pull to improve his projected outcome—e.g., saving more or working one or two years longer. IBR then helps model a retirement income plan that factors in several different types of risk, including inflation risk, interest rate risk, longevity risk, market risk and sequence of returns risk—the risk of seeing low or negative returns as someone enters retirement.

“Ultimately, this is to help come up with a more realistic plan for households,” Hu says. “The major new thing with Income Beyond Retirement is a more explicit modeling of longevity uncertainty, which is really as big a risk as market risk. It helps people look at, what are the chances that you can sustain a given level of spending for the rest of your life, taking taxes into account?” A participant can utilize online tools and/or talk by phone with an adviser on the Edelman Financial Engines staff, he says.

Barbara Delaney, founder and principal in StoneStreet Renaissance, a part of Hub International, in Pearl River, New York, says she has spoken to all of her sponsor clients in recent months about helping their participants make plans for their retirement income. She worked closely on the development of a partnership, announced last year, that will allow participants in a Morningstar Investment Management managed account to incorporate a guaranteed-income product purchased through Hueler Income Solutions’ outside-the-plan marketplace.

According to Delaney, as of late January, six Hub plan clients had signed on to start offering the solution on July 1. She says talks continue with all of the major recordkeepers about incorporating the Morningstar/Hueler solution and that some recordkeepers are more enthusiastic about allowing it on their platform than are others.

To make the process simpler and more understandable for participants, she says, Hub advisers can help guide a participant via one-on-one meetings to think through their retirement vision, their retirement assets and their retirement expenses. Delaney says it has been working well to do that via Zoom. Participants also will be able to talk with Morningstar about questions such as what percentage of their portfolio they might consider putting into a guaranteed-income product, given their specific goals and circumstances.

“It’s a decision that’s very personal, and it can’t be automated,” Delaney says. “My clients don’t want their participants to be sold a product: They want to help guide participants through the decisions they need to make about their retirement income.”

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