From a retirement plan participant perspective, it’s not about which managed account provider one might find interesting, but to which providers an individual participant has access, says Chris Bailey, director, retirement, at Cerulli Associates.
However, he notes that most of the major recordkeepers offer multiple managed account options, which is reflected in the data below from the 2024 PLANSPONSOR Recordkeeping Survey.
Most investors acknowledge that they could benefit from professional advice, with 70% of plan participants agreeing that a financial professional could do a better job of managing their retirement assets, according to the Cerulli Associates’ white paper “401(k) Managed Accounts: A Misunderstood Value Proposition,” developed with support from Edelman Financial Engines.
This is where managed accounts come in, says Chris Bailey, director, retirement, at Cerulli. While managed accounts are talked about as a product, they are really a holistic solution for participants, bringing together financial planning and one-on-one advice.
David Blanchett, managing director, portfolio manager and head of retirement research at PGIM DC Solutions, concurs. Besides an investment product to help employees have a good portfolio, he says, managed accounts are also an avenue to advice and guidance, should the participant want to use the product fully.
Perhaps even more significant, managed accounts allow for the democratization of advice by giving those participants who lack the interest in investing or the money to hire an adviser, access to professional advice, Bailey says. While it is great for investors who have the means to motivate an adviser to support them, why shouldn’t more people have the same access? he says.
Engagement with, and use of, the managed account option continues to be small, even when offered. Bailey cites numbers from Vanguard that show low usage of the accounts when they are available: In 2022, among Vanguard’s client base, 77% of participants were offered, or had access to, managed accounts, but only 7% of participants actually used one. While Bailey says he doesn’t think the product is suitable for all, it’s still likely that more than 7% would benefit from this type of investment portfolio.
Oftentimes managed accounts are compared with target-date funds. Blanchett says he thinks the accounts should be viewed predominantly as a complement to, not a substitute for, TDFs. “There is always this engagement issue among participants in DC plans. For many of the folks defaulted in to the manage accounts, [those are] still effectively a target-date type solution,” he observes. However, he says, for participants who can leverage the advice to figure out answers to some of their more complex questions, managed accounts can provide extra value.
The appropriate comparison, Bailey says, is not to a TDF but to the cost of a financial planner or adviser. “We need to reposition this as a benefit,” not as an investment. The benefit is the whole package, of investment allocation and access to financial planning, he says.
Managed Account Fees and Value
“We’ve seen in some research that there are various ways an individual with a financial plan is more confident and feels better about [himself] than someone without one,” Bailey says. “Leveraging managed accounts allows participants to have comfort and confidence that their account management is under control.”
While there continues to be conversation about fees and performance as those relate to managed accounts, he says, you “can’t put a price tag on confidence.”
Not everyone in the industry, though, subscribes to that sentiment. A February NEPC paper counters it, pointing out that high fees tend to erode the value of managed accounts, as a fee of 30 basis points typically requires a participant to increase his equity exposure by 20% to 30%, or by two to three TDF vintages, to achieve a similar net-of-fee return. Moreover, NEPC argued, participants paying the lower fee of 15 bps, for example, could anticipate returns comparable to a typical TDF investor. Nevertheless, despite the concern about fees, the NEPC paper says, “we believe managed accounts can deliver high quality and efficient investment portfolios for participants.”
Blanchett agrees that the value in managed accounts is not in making them the default fund, due to the charging of an additional fee over what a target-date fund might cost. The engagement with the account is what really drives the personalization, he says, adding that the more people use and engage with them, the more the price is going to come down.
After all, Blanchett says, at the end of the day, these asset allocations are all developed by professional fiduciaries and can support participants who don’t know where to go or don’t have a source to answer questions such as: Am I on track? Or: What should I be doing?
He also anticipates significant declines in the cost of managed accounts over time, and sees this as a benefit for adoption. “If there is no additional cost of managed accounts beyond a target-date fund, it’s a no-brainer for like everything.”
Bailey says an upcoming Cerulli report will examine how recordkeepers can better engage participants during their accumulation and retirement planning stages. Specifically, he says, although “engagement is hard, and giving advice is fraught with fiduciary concerns,” if providers want to get people to save more, they need to be more directive about actions.
Still, the NEPC paper points out that fiduciaries have a responsibility to understand how asset allocation in managed accounts is determined. “The usage, application and magnitude of personalization factors increasingly hinge on the approach of each provider. Furthermore, most providers seem to rely heavily on a single factor that shapes much of their portfolio construction methodology.”
Creating Personalized Retirement Income
The personalization available in managed accounts will likely only continue, Blanchett says. “I have a hard time thinking that in 20 years people in 401(k)s will get portfolios based only on how old they are in five-year buckets. That just doesn’t seem at all consistent with the way the world’s moving.
“So, I think we’re going to see an evolution toward these more personalized solutions, because they not only can use that extra information available, beyond age—into income, saving rate, balance, maybe gender, plan tenure, employer count and more—and give the person additional advice and guidance about things such as saving, spending and retirement,” he says.
Slightly more than half (56%) of plan recordkeepers participating in 2024’s “Retirement Income Solutions Recordkeeper Study” from the Defined Contribution Institutional Investment Association’s Retirement Research Center view retirement income solutions as an important priority.
And a study by PIMCO DC consultants, also last year, reported that adviser consultants who work closely with plan sponsors see adding retirement income solutions as a top priority for their clients’ plan design. However, access to some of these solutions remains limited on recordkeeping platforms.
The Institutional Retirement Income Council’s recent white paper “Transforming Retirement Security: The Essential Role of Retirement Income Solutions in DC Plans” calls managed accounts a potential income solution, noting they are “an example of an investment product that provides personalized savings, investment, and retirement income models based on the amount of information and data the participant provides.”
The managed account has evolved from just an asset allocation vehicle, Bailey agrees. He says several providers, now thinking about issues related to retirement income, have incorporated decumulation planning in their programs. While there are still limitations about how to execute the offerings, they provide participants with additional value.
For participants, the market of retirement income products can seem overwhelming, and determining how to spend down savings depends on many factors, Bailey says. With many options and difficult decisions to make about what solution works for their situation, people need advice, he says. Managed accounts don’t replace that complexity, but they allow a participant to narrow the alternatives by having a plan for her savings in place and receive advice about the potential long-term options.
Where managed accounts can be especially valuable is in cases where someone has a good picture of what her retirement is going to look like, Blanchett says. “We know retirement is just really complicated. When can you stop working, and how much can you spend? How do you invest your portfolio? When do you claim Social Security?”
According to the Cerulli white paper, 401(k) participants cited “having a retirement income plan that is tailored to my personal circumstances and lifestyle expectations for retirement” as the most important attribute of a retirement income plan. Additionally, 44% of 401(k) participants indicated it is very important to have a financial adviser help them create a plan for converting their 401(k) savings into an income stream in retirement.
Down the road, Bailey says, differentiation may come as the platforms may develop the ability to link more accounts, such as from previous employers’ 401(k) plans or external savings. For participants, being able to look at this holistically, and manage savings as one portfolio can allow for a more comprehensive view and decisionmaking.
