Half of Managed Account Users Do Not Provide Requisite Information

Retirement plan sponsors and advisers need to ensure managed accounts are properly used by participants.

If a retirement plan is going to offer a managed account solution to its participants as the qualified default investment alternative (QDIA), the plan sponsor and adviser must ensure participants supply quality and comprehensive asset data and risk information, industry experts say.

“We are seeing that 50% of the participants electing to use a managed account are not providing the additional information they need in order for the provider to be able to customize the portfolio,” says Jason Shapiro, senior investment consultant at Willis Towers Watson in New York. “They are not engaging to the extent that they should be.”

John Doyle, senior vice president, defined contribution, at Capital Group in Baltimore, Maryland, agrees. He says that the trouble with offering managed accounts on a retirement plan platform is that “70% to 80% of the participant population doesn’t get engaged. They are perfectly happy to make an investment selection and leave it alone, or default into the QDIA. If you were to default a person into a QDIA with a higher fee [such as a managed account], you need to ask the question of whether they are getting the value of paying the additional 15 to 75 basis points.” If they are not providing the information to the managed account provider that it needs, “it won’t be a precise portfolio.”

In addition, advisers and sponsors need to realize that each managed account provider will approach the task of collecting information differently, Doyle says. Today, the majority of providers collect basic information off of the recordkeeping system’s electronic feed, whether it is their own or through a partnership with a third-party recordkeeper, he says. This includes age, income, account balance and savings rates, Doyle says.

Further, “a number of providers have partnered with or purchased data aggregation services that automatically pull all participant financial information into one place, allowing for real-time updates and an improved user experience,” according to a Willis Towers Watson white paper, “Are Managed Accounts a Better QDIA?”

NEXT: Additional information that is critical

Beyond that, managed account providers conduct “some method of interaction with the participant,” Doyle says. “It can be as simple as an online questionnaire that will collect a lot of information, such as their risk tolerance, outside retirement savings, college savings and the participant’s income replacement ratio goal. Other models warrant talking to an individual via a phone bank. They are all going to do it differently.”

Ideally, the managed account provider will make it a point to speak with the investor, so that they can learn about their unique needs and all of their financial objectives, such as saving for college, raising a child with special needs or lifestyle goals, Doyle says. It can also be helpful to learn about their total household assets and projected Social Security benefits, he says.

“To get the most out of any advisory solution, you need to be able to provide as much information as you can,” he says. “Without a full picture, you are missing a couple of critical factors.”

Lockwood Advisors of Philadelphia tailors some of its managed account investment solutions to align with “objective-based, or goals-based, investing,” says Lockwood Chief Operating Officer Joel Hempel. “As advisers engage in this process, we help them focus on whether the investor is in the accumulation phase, the preservation phase or the decumulation phase, and help them align the investor’s risk tolerance to the right investment solution. The adviser needs to know where each investor is in their life cycle. We are continuously asking them about key elements of their life, be it children, marriages, funding education, budgeting, retirement, downsizing. The portfolio cannot represent a moment in time but should instead be a living, breathing plan.”

However, Doyle says he isn’t sure how robust all managed account information collecting processes are, or how proactive they are in continuing to reach out to their investors.

Over the past three to five years, Fidelity Investments has become decisively aware of managed account investors’ inertia, which is why it has developed a system with continuous touch points to inspire these investors to update their information and remain engaged, says Chad Elliott, senior vice president, workplace managed accounts at Fidelity Investments in Boston.

“Some portion of the population will always be harder to engage,” Elliott says. “But by integrating workplace managed accounts with the recordkeeping system and data aggregation tool, we can learn about your balance, savings rate, age and investment time horizon; this is the 60% of the profile that we can automatically update. But 40% needs to be done in person.” Within the first 60 to 90 days a participant selects a Fidelity managed account, the firm conducts a welcome onboarding campaign that emphasizes completing the profile and sets their expectations for how the service works, Elliott says.

“The big takeaway is that people should not put managed accounts into the ‘set it and forget it’ bucket,” he says. “Otherwise, they are not getting the full value. The value is the flexibility and the ongoing engagement with the provider that affords them the opportunity to update their information as their life changes.” 

NEXT: Frequent touch points

Then, every quarter, Fidelity provides quarterly updates on each participant’s portfolio, a market outlook and insight into how that has impacted their portfolio, Elliott says. “We use those to try to drive people into the net benefits portal and reinforce the importance of keeping their profile up to date. After 10-1/2 months, we remind them of their approaching one-year anniversary and encourage them to review their investment strategy based on their latest information. It’s an ongoing process to engage with people.”

Given the need for this level of enthusiasm from participants, it may not be surprising that the 2015 PLANSPONSOR Defined Contribution Survey found that only 30.6% of retirement plans offer a managed account, and that the Vanguard 2013 How America Saves Survey found that only 7% of participants invest in them.

This is why Willis Towers Watson recommends that plan sponsors that want to improve their participants’ outcomes adopt a “hybrid” model, as Shapiro puts it—a target-date fund as the QDIA alongside the option of opting into a managed account. “Since half of the people choosing to use a managed account are not providing the requisite information, that would be exacerbated if it were the QDIA, which is why we have begun discussing a hybrid solution with plan sponsors. Younger people have simpler financial situations, and they may be well served by a lower-cost TDF. As they get older, perhaps age 50 or 55, a managed account may be more beneficial, and sponsors may want to consider automatically enrolling this population into a managed account. Some providers and recordkeepers are beginning to talk about this—but we are in the very early days” of this becoming a reality.

Doyle agrees that this hybrid model would make sense—as long as providers, sponsors and advisers proactively reach out to the people being defaulted into managed accounts.  And that goes back to the industry’s overall goal to engage all retirement participants, no matter what they are invested in or regardless of whether they are automatically enrolled into a default investment, he says.

“We have been trying to get participants engaged for a long time, and we as an industry will continue to try to get participants more engaged,” Doyle says. “It has been 10 years since the passing of the Pension Protection Act, and we still have a ways to go.”