Managed Accounts Go High Tech

How ‘robo’ methods turned the investment strategy into a viable default for 401(k) plans. 

Advisers to ERISA plans are embracing managed accounts—particularly the “high-tech” type—as an important part of a 401(k) plan’s investment lineup, even its qualified default investment alternative (QDIA).

“In the last 12 months or so, a number of the defined contribution plan consultant community have come around, and said, ‘Managed accounts really have some strong benefits as an offering or a QDIA,’” explains Jim Smith, vice president of workplace solutions for Morningstar Investment Management. This attitude has likely influenced plan sponsors, too, as the accounts show up increasingly on investment menus, he says.

Plan sponsors still sometimes resist the accounts, due to additional fees for the extra services involved—services that can be overlooked or misunderstood by participants. Managed accounts have a steeper learning curve than required with target-date funds, the runaway choice for QDIA, says Steve Dorval, managing director of retirement and investment strategy at John Hancock Retirement.

Still, these experts and others believe that, thanks to advances in technology, plus recognition of the importance of guaranteed income, the day for managed accounts may have come. This warming on both sides of the investment process could only exist because of recent changes in the accounts themselves that contend with the longstanding gripes.

Adding to managed account momentum, discoveries from the ”robo” revolution reveal how to engage users on a website or mobile device, and in the process, collect important data. Collecting data is central to making managing accounts work, and, says Smith, the resulting personalized engagement has been a big draw.

The only piece of data a target-date fund really needs is a participant’s age. “An investment strategy based on age alone, while better than no strategy, can’t produce the results of a customized one,” Dorval says.

Smith agrees: “The more data you can get, the better job you can do for a plan’s participants.”

NEXT: Getting engaged

The new wave of automated managed accounts consider a worker’s salary, age and contribution rate. Some can account for other outside income sources and assets, including a spouse’s, or even the tax outlook in the state of residence. All of these factors are important to a retirement investor, Smith says.

With John Hancock’s managed account, “participants sign up for the aggregation engine, provide information about their current accounts and allow us to see that data; then we can apply our analysis to that, which can help to refine the recommendations, both upon how much you’re going to need to live on in retirement and what’s the optimal approach to both a saving strategy and an investment approach to achieve that goal,” Dorval says.

Bank of America Merrill Lynch’s managed account service recommends an initial contribution, asset allocation and specific investments based on how much data the participant supplied. He may thereafter provide further data and/or adjust his life expectancy, projected retirement age and retirement income goal. Like many other managed accounts, depending on options selected, this one can be rebalanced and reallocated periodically to reflect participant updates. The person may seek out advice online or from a call center.

The above services also set managed accounts apart from target-date funds, and results cannot be compared, says Gary DeMaio, defined contribution product manager for the company. “Part of the problem is that there is still confusion around what managed accounts are and how they are different from TDFs. A managed account is a personalized investment advisory service while a TDF is just a fund,” he says. 

NEXT: What due diligence has found

According to Smith, before investing too deeply in support of managed accounts, advisers have performed considerable due diligence. “They’ve done a lot of due diligence with firms like us. … Some of the scrutiny of target-date funds has precipitated this,” he notes.

Some large and mega plans have even made managed accounts their QDIA, he says, adding that the decision usually reflects others the plan sponsor has made such as on plan philosophy or platform—whether it is open, and consequently more receptive to the accounts as default, or closed. “In our case, the provider, and its philosophy on what makes for a good QDIA, ends up driving whether or not managed accounts will be more popular as a QDIA,” Smith says. “Those that are strong advocates of target-dates will probably still continue to use them, for the most part, as their QDIA.”

Whether participants utilize the services or not, the optics of extra fees can discourage plan sponsors from adopting the accounts. Dorval, however, says this concern can be unfounded, as the fee collected is bringing significant additional value to the plan and the investor.

NEXT: A managed account may be cheaper

“Whether or not a managed account is more expensive depends on what you’re comparing it with,” Dorval continues. He cites the example of a plan with a managed account averaging participant fees of 40 basis points (bps) along with an indexed lineup averaging 40 bps. “All in all, participants pay 80 bps; that’s less expensive than many target-date funds in the marketplace,” he points out.

“If you’re comparing with a target-date fund series that’s, on average, 1%, managed accounts are actually cheaper. If you’re comparing it with Vanguard, at 19 bps, it’s more expensive. So the reality is much more complicated than general perception,” he says.

Bank of America Merrill Lynch eliminates the fee barrier entirely by not charging participants for its managed account service, says DeMaio. “In fact, with plans using automatic enrollment on our platform today, the service is a more popular default investment than TDFs, by more than a two to one margin.”

If the company meets resistance for its managed account product, this is usually in the form of “a misunderstanding of what managed accounts are and what they can deliver to their employees,” DeMaio says. “Sixty percent of our plan sponsor clients are offering [them], recognizing the benefits of making advice available to their employees.”

He also speaks to the question of learning curve: “The perception is that managed accounts are complicated, but once we illustrate how easy it is for employees to engage and utilize them, they usually move quickly to implement the service.”

NEXT: ‘The optimal managed account’

Looking to the future, Bill Van Veen, director of interactive platform management, also at Bank of America Merrill Lynch, believes that technology-enabled accounts will focus even more on personalization, be it more guidance on inputs such as income replacement ratio, life expectancy, health care expenses, Social Security optimization, or outputs with more targeted recommendations on deferral rates and portfolio placement.

“Holistic financial wellness will continue to be a key focus,” he says. “Therefore assessing the results of the managed accounts and their impact across other financial measures, and integrating those results into a participant’s overall financial wellness assessment, will be critical.”

Morningstar, producing managed accounts for about 10 years, has been part of their evolution. Smith notes that, as that process continues, they are acquiring the ability to prescribe a draw-down strategy, post-retirement—one that will recommend which income source to draw from first, to maximize a portfolio’s value while best achieving the participant’s desired retirement lifestyle. “[These features] make managed accounts more and more attractive to retirement plans and plan sponsors,” he says.

Dorval envisions what he calls “the optimal managed account,” where advanced aggregation engines will enable the participant to provide credit card account and bank balance information once, after which John Hancock will “directly interface with the other financial institutions to keep all of their information fully up to date and conduct analysis on this, [in] real time,” Dorval says.

While plan advisers like the updated strategies for their benefits to participants, an additional layer exists, says Smith. Some advisers see the account as a service to them personally, because it eliminates the need to select funds for the individual participants, he says. “Advisers can focus on what is the benefit to the plan, reviewing the funds in the lineup, working on plan design items rather than on [those] allocations within the plan year.” They still maintain a hands-on role, performing ongoing due diligence on behalf of the plan sponsor, reviewing what the managed account provider offers,” he says.

Dorval urges advisers as plan fiduciaries to keep an open mind about the accounts, to tell plan sponsors their pros and cons, whether he agrees with the product or not. Also to keep in mind: “The managed accounts that exist in a year won’t be the same as those that existed a year ago. So make sure [sponsors] stay up to date and understand the capabilities of what’s available, not what always has been available,” he says.

“The goal should be to get advice into the hands of as many people as possible to help them to meet their retirement needs. So an adviser should think about what his value proposition is and then see how managed accounts play into their value proposition, as well.”