It’s possible many of us soon will have additional reading time as the likelihood of further pandemic lockdowns increases. The two research reports discussed below both present interesting perspectives on: 1) the value of managed accounts in 401(k) plans, and 2) advisors’ thoughts on overhauling the recordkeeping function.
Managed Accounts versus Target Date Funds
The arguments for including a managed account (MA) on a 401(k) platform have an intuitive appeal. Instead of fitting the participant to a target date fund (TDF) managed for a broad cohort, why not give the participant a more flexible and customized portfolio that can account for his or her circumstances?
According to Vanguard’s How America Saves, 2020 report, 37% of plans offered managed account programs in 2019. Sixty-three percent of participants had access to them but only 5% used them, a result that has barely moved above the 4% usage rate from 2015 through 2018.
An October 2020 report from Aon Investments, Are Managed Reports More Efficient than Target Date Funds?, challenges the arguments in favor of MAs. The report offers three major conclusions:
- The degree of portfolio personalization should be examined more thoroughly. The difference in glide paths between MAs and TDFs accounts for a considerable portion of “personalization,” and personalization statistics may be inflated relative to the effect on participant portfolios.
- MA fees are high and erode ultimate performance and account balances. The additional layer of fees from MAs creates a significant headwind to returns. Recordkeepers as distributors of MAs often retain a significant portion of fees and create an often-overlooked barrier to fee compression.
- Claims of value outside portfolio management have issues. MA providers’ claims of value from improved savings rates are often based on faulty logic, even sometimes claiming credit for services that are available without enrolling in MAs. This is especially problematic for older participants who are the primary users of MAs and often have much higher account balances, causing the fees from their MAs to be sizable relative to their contributions.
The study uses three primary data sets: 1) the asset allocation of a commonly used TDF; 2) the asset allocation of a commonly used MA; and 3) the model plan’s participant asset allocations implemented with the MA provider with an assertion of 99% personalization. Analyses include the resulting portfolio allocations and the relative portfolio efficiency of MAs and TDFs.
It’s an interesting analysis and the authors come down firmly in favor of TDFs. Their overall conclusion: “Today, we find that the benefits of MAs for portfolio efficiency and personalization are typically small relative to the cost. Though there may be some MA participants who receive sufficient value for the additional fee, these findings advocate for continued use of TDFs for the majority of participants.”
Does the Recordkeeping Business Need an Overhaul?
In a perfect world, plan sponsors and advisors would agree on their requirements from the recordkeeper, whose services would keep everyone happy. Well, maybe.
Vestwell’s 2020 Retirement Trends Report found that advisors and sponsors have different expectations around the recordkeeper’s role. Among the key findings from the advisors and sponsors surveyed:
- Three out of four advisors believe recordkeeping technology should be overhauled. For that group, high fees and poor user experience are the most common complaints. They also want more self-service available so they can spend more time educating participants, which is where they believe they add the most value.
- Advisors and sponsors agree that strong customer service, user-friendly experience and cost effectiveness are the top three reasons to select a plan provider, with advisors placing a greater emphasis on good customer service.
- Advisors and sponsors use different metrics to gauge plan success. Advisors focus more on plan participation rates but sponsors focus on avoiding administrative errors and minimizing the time required to manage the plan.
- Sponsors view the advisor’s greatest value as educating them on plan administration. In contrast, advisors rank this as their lowest value-add.
The study delves into more detail on additional data points that highlight others contrasts between advisors’ and sponsors’ perspectives. Vestwell’s CEO Aaron Schumm says that while it was validating to see that nearly 90% of plan sponsors value their advisor relationship, advisors should pay attention to how plan sponsors perceive that value. Twenty-six percent of advisors believe they add the most value to a plan by educating participants about investing decisions but plan sponsors don’t agree. Instead, sponsors believe their advisors add the most value by helping them as opposed to their participants: 25% felt their advisors added the most value by recommending/monitoring plan investments while another 25% felt it’s through educating them on effectively running a plan.
“While we agree with advisors that participants create a great opportunity to build relationships and cement life-long engagement, these findings highlight the importance of expectation setting,” Schumm said. “By aligning upfront, advisors can articulate the importance of engaging with the end user, while more clearly defining their role around plan administration and oversight.”