Managed Account QDIA Mechanics Challenge Plan Sponsor Clients

ERISA attorneys and plan design consultants say they are hearing more questions from sponsors about using managed accounts as a plan’s default investment, but the most common use case remains opt-in managed accounts.
Art by Wesley Allsbrook

Art by Wesley Allsbrook

Industry experts commonly say that managed accounts make sense for more engaged investors with a larger nest egg, or those with more unique needs that can benefit from a personalized asset-allocation approach.

In practice, it is older investors in retirement plans who tend to fit this description. However, plan sponsors are increasingly interested in the role managed accounts could play as a plan’s default investment—to be used by all new entrants into a plan who choose not to make an investment section of their own.

In her experience, many in the defined contribution (DC) plan industry are investigating managed accounts as the qualified default investment alternative (QDIA), says Jodi Epstein, partner with Ivins, Phillips & Barker in Washington D.C. However, opt-in managed accounts remain the most common use case, for a few key reasons.

“Having a managed account as the QDIA—as the default—means participants are not actively choosing it and providing more information about themselves,” Epstein says. “This is the information a managed account needs in order to tailor the underlying investment selections to individuals’ specific circumstances. In addition, I have a difficult time seeing how fiduciaries can justify the cost of a managed account compared to, for instance, a target-date fund.”

When it comes to “hybrid QDIAs,” which automatically roll participants from a TDF option to a managed account when certain wealth or age triggers are met, Epstein is also cautious. Actually deciding when and how to roll participants automatically from one product to another leaves Epstein with fiduciary concerns.

Epstein says, “If I had a committee interested in a hybrid QDIA, I would have them document how flipping a non-engaged 50-year old in a TDF at 15 basis points as opposed to a managed account at 45 basis points is prudent. The participant can opt out, but because this is the default option, they are by definition not engaged, so they probably won’t opt out, and the managed account is twice as expensive and may or may not give them much advantage.”

Managed accounts are the default for only 4% of DC plans, according to a 2018 Callan report, but the availability of managed accounts has steadily increased over the last decade, up from 6% of plans in 2005 to 55% of plans in 2017. Part of the growth in managed accounts’ popularity as a non-default option is driven by the ballooning amount of data available on participants. This has increased exponentially from 2007 compared to today, experts agree.

According to a Morningstar report called “The Impact of Managed Accounts on Participant Savings and Investment Decisions,” in 2007, most recordkeepers only knew a participant’s age and plan balance. Some recordkeepers also knew a few other data points which included salary, savings rate and the employer match amount. By 2017, though, most recordkeepers could cite many additional data points including salary, savings rate, brokerage accounts, location, loans, employer match and employer tiered match. Some recordkeepers also know a participant’s anticipated retirement age, pension access, gender and outside assets. As a natural extension of the increasing data availability, providers of managed accounts are working to automate their use of participant data, so that managed accounts can work well without needed the participant to plug in lots of information on their own.

“Within plans providing access today, managed account adoption as an opt-in varies greatly from low single digits to 40%,” says David Blanchett, head of retirement research for Morningstar Investment Management LLC. “The difference is based on plan sponsor support and how the managed account is integrated into promotion materials and on recordkeeper platforms.”

According to Mike Volo, senior partner, Cammack Retirement Group in Wellesley, Massachusetts, the price of managed accounts has been driven down substantially in the institutional marketplace. They are typically 30 basis points to 40 basis points on average, compared with a retail managed account that could range as high as 1% of assets. He says institutional managed accounts on a relative basis are quite appealing.

“Adoption is usually in the single digits because participants are often not aware that the managed accounts are available,” Volo “The big question is how and when to educate and encourage folks to engage with a managed account. It all comes down to targeted communications.”

Volo suggests the adviser working with the plan sponsor and the recordkeeper can outline a communication strategy to target the participants for whom a managed account may be a good solution. Whether the campaign is based upon age, account balance or likely a combination of both, participants can receive targeted communications making them aware of the offering.

Lorianne Pannozzo, senior vice president, workplace planning and advice, in Fidelity’s Boston office, agrees that targeted communications have the most impact. “Success is a matter of who you send the value proposition to and letting them actively opt-in to it.”

There is a very clear value proposition for a managed account—it’s personalized and suits those with more complex financial needs, Pannozzo says. “At Fidelity we have support tools to help a person decide whether or not they can invest their assets themselves or if they are a target-date fund or managed account type of investor. In most instances, you are sending targeted communications and allowing the participant to decide for themselves what is right for them.”

From a plan sponsor fiduciary perspective, Epstein says it is much less risky telling participants a managed account is available rather than defaulting them into one. She would suggest to clients that they use verbiage such as “you may want to consider” or “you may want to learn more about this option and here’s how to do that.”

“If it’s available as an option, you certainly want people to know it’s there. And it’s fine to explain who it may be appropriate for—what age or level of assets in plan and out of plan,” Epstein says.

Nathan Voris, managing director, strategy, at Schwab Retirement Services in Richfield, Ohio, says, “It’s easy to talk about the pre-retiree and managed accounts because it’s more tangible. But if you look at the math there’s a lot of value for younger folks as well.”

He says there are a lot of advantages for even the average Millennial to enroll in a managed account, assuming the account has reasonable fees. He suggests the personalization that comes along with a managed solution means even younger participants tend to be more at-ease during periods of volatility.