Inching Forward

Managed accounts remain a rare QDIA.

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.”