Advancing Advice for All

Art by Patrick Edell

When Empower Retirement launched its new adviser managed accounts (AMAs) in March, SageView Advisory Group LLC had already signed on to utilize the service and thereby offer its own managed accounts to 401(k) plan clients.

“We have, in the past 10 years, become more comfortable with using managed accounts in 401(k) plans,” says Jon Upham, a principal with SageView, in Irvine, California. As employees age and their financial lives grow more complex, they benefit more from personalized asset allocation, Upham says. “And we’ve seen how assets are staying in plans when people retire, and even upon termination.”

Keeping those assets in a plan’s managed account gives people customized advice at a lower fee than in the retail market, and the resulting increased plan assets can help lower fees for all participants. “We’re viewing it as an economic solution to help people get personalized advice, versus having to leave the retirement plan to do that,” he says.

Empower is not the only provider to recently take steps to simplify offering a managed account service to plan clients. In April, Morningstar Investment Management LLC launched its new adviser managed account platform, and CAPTRUST became the first registered investment adviser (RIA) firm to use it. Schwab Retirement Plan Services Inc. agreed to be the first recordkeeper to integrate the Morningstar service.

A decade ago, plan advisers’ challenge regarding managed accounts was to learn about the accounts’ value to plan participants and to perform due diligence on providers’ offerings, recalls Nathan Voris, managing director at Schwab Retirement Plan Services in Richfield, Ohio. “It has become an issue of, ‘How do I play a role here? I know the culture of the company; I know the needs of participants. I might be in a really good position to have one-on-one conversations with participants and understand the unique needs of that plan,’” he says.

The Next Step

Adviser Mike Kane’s industry roots trace back to launching a fee-based financial planning practice in 1982, and he remembers the impact that one-on-one advice had. “The key is to sit down with people and get to know them, and help them figure out what their objectives are. [Investors] end up doing better when you do that,” says Kane, managing director of Plan Sponsor Consultants in Atlanta. “To me, this is the next step in financial planning for retirement plan participants: to make it personal and cost-effective.”

Participants need much more help than just on their investment strategy, says Brian Cosmano, vice president of strategic product initiatives at Empower Retirement in Greenwood Village, Colorado. Target-date funds (TDFs) have done a great job, getting participants into an appropriate asset allocation, he says, but they fail to offer broader help. Participants in a managed account can get personalized advice on key topics such as how much to contribute to ultimately reach a retirement-savings goal and how to time retirement and filing for Social Security benefits, as well as receive a withdrawal strategy recommendation.

The benefits for participants of a managed account’s personalized advice go beyond investments, Schwab’s client experience indicates. “We also see [users’] savings rates go up,” Voris says. “They can see where their retirement-savings gap is and how to close it, and participants can start to develop an action plan for their retirement. Advice works.”

Kane says Plan Sponsor Consultants has thought about offering a managed account service. “There’s been a push in the industry to have advisers have more input on managed accounts,” he says. “We’ve been waiting for this to evolve to the point where a provider’s managed account service has the elements we think make a successful opportunity.”

What elements would make offering the service worthwhile? “As an RIA, you need to be prepared to assist in both participants’ accumulation and decumulation investment portfolios,” Kane says. “The managed account pricing has to be competitive, and you have to add in some in-person direction by the adviser as financial coach. If you incorporate all that stuff into it—asset allocations based on models tested by the RIA, reasonable costs for participants, and the personal coaching—then we’re onto something. But if you start taking elements away from that, then there’s not as much of a value proposition.”

How It Works

In 2015, Schwab became the first provider to offer an adviser managed account service to help advisers build customized portfolios for retirement plans, Voris says, adding that “several” plan advisers use the system today. The fact that the setup works exclusively with Schwab and not with other recordkeepers is a challenge for advisers, he says. “Advisers might have 10 or 12 recordkeepers they work with. To build this very customized relationship with Schwab—that doesn’t work for a lot of advisers.”

This realization helped motivate Schwab to sign on to incorporate the new Morningstar service in its recordkeeping platform. “The idea is that this can work with six or eight or 10 recordkeepers,” Voris says. “If an adviser can use a managed account program with multiple recordkeepers, that’s really attractive. Morningstar has solved for this issue.”

The usability with multiple recordkeepers is key to the new Morningstar offering. “The technology, methodology, user experience and the service model will be consistent across all recordkeepers,” says Daniel Bruns, Morningstar vice president of product strategy in Chicago. As of early July, he says, Morningstar had a verbal commitment from two more recordkeepers to incorporate the offering into their platforms, and he expected at least one to go live with it by year-end.

Bruns gives a quick walk-through of how the investment portfolio construction happens: “Once we get the data from the recordkeeper, Morningstar’s analysis determines the target equity percentage in each participant’s portfolio. Then we match that equity target to a fund-specific portfolio that the advisory firm’s home office has built. The advisory firm takes on a 3(38) fiduciary role for the portfolio construction.”

As for the participant touch points, an advisory firm can co-brand the Morningstar online managed account interface for the client, so participants will see a familiar name. Morningstar also trains call-center staffers at the firm or at its own recordkeeper partners on how to answer questions about the offering. “Advisers are typically leveraging the recordkeeper’s call center to answer questions by phone,” Bruns says. “Some advisory firms also are planning to have their advisers sit down with participants to talk about the managed accounts.”

The process for Empower’s new AMA offering begins with the recordkeeper gathering both its own participant data and employee data from an employer client’s payroll provider. It has outsourced the initial risk assessment to Morningstar. “We send all that data to Morningstar, which determines the target-equity/fixed-income allocation for each participant,” Cosmano explains. “Then the adviser decides in which asset classes and funds participants should be allocated.

“At the end of the day, this is the adviser’s program: He is acting as a 3(38) fiduciary to individual participants,” Cosmano continues. “He’s in charge of building the portfolios.” But beyond that, Empower handles many operational aspects of the managed accounts. It provides the financial planning tools and participant website, which, too, may be co-branded with the adviser’s firm name. The recordkeeper also has a call center focused only on helping participants with managed accounts. “Where the adviser comes in here is in the workplace presence, helping participants,” he notes.

Three Potential Challenges

Offering managed accounts does potentially create challenges for plan advisers. A few are as follows:

1. Unknown growth potential. “The first challenge is that, while managed accounts are growing in popularity, at this point they are only 4% to 5% of assets in the DC [defined contribution] market,” Cosmano says. “Adoption is the No. 1 issue.” Yet, he sees promise in the current approximately 35% annual growth in managed account assets among Empower plan clients.

SageView anticipates three main avenues for the growth of its managed account service, Upham says. Some participants may decide after having a one-on-one conversation with a SageView adviser that this service meets their needs, while self-learners may proactively seek out the service once their plan starts offering the option. Finally, he says, some plan sponsors are thinking about using the “dynamic QDIA [qualified default investment alternative]” approach, which automatically switches participants from a target-date fund default into a managed account at a point predetermined by the sponsor, such as a certain age or account balance reached.

2. Sponsors’ fee concerns. Offering a managed account service involves more work, so it typically carries a higher fee than some other investments. “Some sponsors say, ‘We’re paying X basis points for target-date index funds, and there’s no doubt that managed accounts have a higher fee,’” Cosmano says. “But this is more than an investment strategy: It’s an entire investment solution. There’s a large education about the value of managed accounts that needs to take place and hasn’t.”

Asked for advice on how advisers can broach this topic with sponsors, Bruns suggests first looking at plan participants’ current investment allocations and how optimal, or suboptimal, they are. For example, the Morningstar plan analysis tool can suggest how a plan’s participant base could be allocated in managed accounts as a default investment. “That allows a plan sponsor to compare its current target-date fund allocations with managed accounts and quickly see if it makes sense to think about making a change,” he says.

Bruns also recommends talking with the sponsor about its comfort level with current plan success metrics, such as deferral rates and projected income-replacement rates. “Are participants saving enough now? And what support might they need as they get near retirement?” he says. “Philosophically speaking, how important does the employer think it is to facilitate them getting that help?”

3. Conflict-of-interest optics. Some sponsors may be wary about hiring the same advisory firm to provide its managed accounts that is already responsible to evaluate the plan’s investment menu. Asked how SageView will deal with a sponsor’s potential perception of a conflict, Upham says it will utilize the same consultative and transparent communication philosophy it uses for all work. “For sponsors interested in managed accounts, we will have conversations about what is available in the marketplace, including our service and third-party services,” he says.

“Some sponsors will be comfortable with us doing the managed accounts, but others may come down on the side of, ‘We are not sure we’re comfortable with it, and we’re going to use a third party,’” Upham says. “We are fine with that. Our main business is providing advice to plan sponsors, and we don’t want to alienate them.”