Recordkeepers Are Leaning In on Managed Account Offerings

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The country’s largest recordkeepers are continuing to bet on managed accounts as a key tool to personalize retirement saving for plan participants.

In conversations with Fidelity Investments, Empower, the Vanguard Group, and Principal Financial Group, executives reported growth in both plan sponsor adoption and participant uptake of managed accounts as they continue to invest in further personalization and distribution.

“The market speaks for itself,” says Lorianne Pannozzo, head of workplace personalized planning and advice at Fidelity Investments. “We’ve seen the tremendous growth in plan sponsor adoption. We’ve seen the tremendous growth in participant adoption … and there is a 98% annual retention rate for those participants [in managed accounts]. So, they are speaking with their feet on where they see value.”

David Stinnett, principal of strategic retirement consulting at Vanguard, notes that among the firm’s 5 million participants on its recordkeeping platform, 77% currently have access to a managed account through their retirement plan, and 9% of that group are enrolled. In addition, he says, requests for proposal for Vanguard’s services will always ask about advice for participants.

“It has become a table stakes, critical service offering for every serious recordkeeper to have, whether it’s a proprietary service or use of a third party,” he says. “It really is necessary to have a compelling offer in the recordkeeper space.”

Other recordkeepers expressed similar sentiments. The managed account focus comes roughly two decades after the product first came on the scene, with major evolutions in that time. Meanwhile, they are competing with a dominant target-fund space, which not only offers lower fees, but is continuing to evolve toward more personalization as well, says Kerry Bandow, head of defined contribution solutions with Russell Investments.

Bandow, who works with mega-sized plan sponsors, notes that larger providers may be more inclined toward managed accounts in part because their size can help negotiate lower fees, a benefit smaller-sized plans won’t have.

“Fees are a factor,” Bandow says. “If you can’t get the fee to a reasonable level that may cause you to pause and consider whether it’s worth it.”

The other area of focus, he notes, is the makeup of the participant pool. “We know workers closer to retirement tend to be more engaged,” he says. “If you have a younger workforce, you may decide they are better off in TDFs.”

Evolved Offering

Fidelity’s Pannozzo stresses the innovations in managed accounts that have made them more personalized both in investment strategy and what they can offer by way of advice and holistic guidance to participants. Her firm has been offering managed accounts for 20 years through a combination of its own proprietary offering and third-party provider Edelman Financial Engines, with a push in recent years toward the holistic financial advice participants can get with the service.

“We really started focusing more on the planning,” she says. “How does your investment strategy tie to your overall retirement plan and the personalization that can be provided to an individual? We’ve become more sophisticated in how we use information about our participants to really drive the associated plan and investment strategy.”

Brett Fisher, head of investment product strategy for Principal, says they offer a suite of options in the managed account space, including Principal’s Target My Retirement, a partnership with Morningstar Inc., Edelman Financial Engines for plans of over $500 million or more, and an adviser managed account in partnership with Creative Planning LLC. Last year, the firm also announced an intelligent qualified default alternative investment option by which a plan sponsor can have participants shift from a TDF into a managed account at a specific age.

Fisher says the impetus for the suite comes from surveying that shows that 81% of employees feel uncomfortable when making financial decisions, and 54% don’t know when to engage a financial adviser.

“Principal definitely believes that engaging an adviser is the gold standard, but this data tells us that not all participants will, so there’s a need for providers like Principal to give that scalable solution,” he says.

Vanguard’s Stinnett notes that financial advice as a service has of course been around for a long time, but making it available to all income levels and compensation levels and linking it to their 401(k) is relatively new. He points to questions from participants that go well beyond an investment menu lineup, including whether to invest pre-tax or Roth, whether to prioritize short-term financial security versus long-term retirement needs, or how to manage various pools of money from past jobs or alongside a spouse’s assets.

“All these questions are seen as legitimate, and the question was, can the industry meet this new need? Can they respond to the call?” he says. “The recent history has been a good one, first with target retirement funds, and I think the latest iteration is around managed accounts.”

Growth Market

Fidelity has seen a 70% increase in plan sponsor clients offering managed account services over the past five years, according to Pannozzo. In the meantime, growth among participants is up 125%, accounting for over one million participants. The personalization head believes that, despite the success of target-date funds, managed accounts ultimately have more to offer participants.

“We have information that can be used to personalize their account above and beyond what a target date fund uses,” Pannozzo says. “80% of our managed accounts participants are proactively providing additional information about themselves….they are providing that information in some way to use it in the construction of their plan and investment strategy.”

Ed Murphy, president and CEO of Empower, noted in an interview after the firm’s Q4 earnings call, that the firm has close to $125 billion in assets in managed accounts, with as much as 9% of its 18.5 million participants in the offering.

“I think that product is continuing to evolve, and I think some of the underlying solutions within managed accounts are going to continue to evolve,” he says. “There’s lots of interesting conversations about how you think about incorporating alternatives, non-correlated assets and things like that…I would say within Empower we continue to see a lot of demand for a discretionary managed portfolio that’s personalized.”

Three years ago, Principal had immaterial exposure to managed account offerings, Fisher says. But after embracing the product, the recordkeeper has $4 billion in assets under management across its suite. In 2023, the firm saw a 25% increase in plan adoption count and a 62% increase in participants enrolled, Fisher says.

Future State

Going forward, Fidelity’s Pannozzo says the firm will work on three areas to advance its offering.

• Maximizing the amount of information gained when a person signs up;
• Using external information either provided by the plan sponsor, or, when available, information that may be held in other Fidelity accounts
• Having an ongoing engagement strategy to continue a conversation with the participant

Principal’s Fisher notes that, for participants who are not yet enrolled in an account, the recordkeeper helps sponsors with email campaigns. It also has educators who can explain the product in one-on-one sessions with participants.

Those participants, of course, will have to consider the added fee for the service. Fisher says managed account fees will generally be tiered, similar to TDFs, based on overall plan size as well as the participant’s account value.

Russell Investment’s Bandow notes that, for larger plans with more assets and participants, his firm has been “more successful getting those rates down to under 20 basis points.” Meanwhile, whereas recordkeeper-offered managed accounts can come at lower costs, third-party providers can be costlier because they are sharing revenue with the recordkeeper platform.

Fees matter, of course, beyond just the immediate impact on participants. A survey last year from Sway Research noted that some advisers and sponsors may be hesitant to use managed accounts for fear of litigators jumping on any investment product for participants with higher fees. Vanguard’s Stinnett notes that “there is absolutely a critical role for plan sponsors from a fiduciary standpoint” for any kind of investment and advice offering. But he sees managed account solutions as being in a good position to stand up to that scrutiny.

He notes a few key factors when considering a new investment product, including that it is “sensitive to cost,” and that it is “premised on sensible investment advice, not some sort of gimmicky thing.” Good managed accounts, he says, stand up to those tests.

“If you invest solely in a target date fund, you will do great, but all we know about you is when you expect to retire—we treat everybody the same,” he says. “There is a growing number of people who want to personalize things a little but more, and I just think it’s a great development that plans are providing that capability.”