Managed accounts have become more widely available in recent years. In the April 2016 issue of The Cerulli Edge, Cerulli Associates reported that 22 percent of defined contribution (DC) plans offered managed accounts by year-end 2014, providing access to 55 percent of plan participants. But, another statistic in the report indicated that only 7 percent of participants with access to managed accounts are using them, a level that’s essentially unchanged since 2009.
Not for Everyone
David O’Meara, senior investment consultant with Willis Towers Watson in New York City, says the relatively low participation rate isn’t surprising. Managed account participants incur an additional fee, and that fee is often justified only if a participant’s finances are sufficiently complex to warrant the additional service. “We’d say the vast majority of participants are better served in a target date fund,” he maintains. “There they could get cheap access to professional asset allocation and there’s not really much that’s unique about them (i.e., their finances) that would necessitate a managed account program.”
O’Meara cites several factors that can tilt the decision in favor of a managed account. Participants’ account balances and overall wealth tend to increase with age and higher positions in organizations. Their financial goals also become more complex. While younger participants focus on accumulation, those approaching retirement frequently must consider multiple accounts and the need to translate their savings balances into sustainable incomes. Consequently, even though less than half of older participants will typically switch to a managed account when it’s available, that cohort’s participation rate often can move above single digits, he notes.
An Evolving Option
Chad Elliott, senior vice president for Boston-based Fidelity Investments’ workplace managed account business, says that including a managed account option is becoming the norm among plans. The only reason a sponsor might not include one is that the plan’s existing investment options were suboptimal in the sense that the plan lacked sufficient diversity in its asset classes.
Assuming a plan has an adequately diversified lineup, the focus shifts to determining which participants will derive value from active management. There are two sides to that story, Elliott says. The complexity of a participant’s finances is one element; participants’ preference for additional customization in their plans is another. Even if a managed account is not the optimal solution, some participants may still prefer it for the customization, he notes.
Managed Accounts as QDIAs?
The key to higher adoption rates for managed accounts will be their designation as qualified default investment alternatives (QDIAs), says Elliott: “Until plan sponsors start deciding to use it as a default investment option, like they did with target date funds, I don’t think you will see the participant adoption numbers explode much above 20 percent.”
But will sponsors make that change? In its report, Cerulli argues against QDIA-status, stating: “The managed account is best suited not as a QDIA for the masses, but rather for a narrower, but wealthier segment of investors.” Plan sponsors appear to agree. A 2015 Willis Towers Watson survey and report, Insights: Are Managed Accounts a Better QDIA? Yes, but at What Cost? found that only 3 percent of surveyed plans used managed accounts for their QDIA as of year-end 2014.
The Willis Towers Watson report cites several roadblocks to increased adoption of managed accounts as QDIAs and suggests possible solutions. The first roadblock is the additional fee participants must pay, which typically starts around 50 basis points annually and scales higher for smaller plans. Lower fees could motivate increased participant adoption.
Another solution could be to allow the managed account to access investment strategies outside the DC plan’s core lineup. The report notes that defined benefit (DB) plans have consistently outperformed DC plans and that result can be at least partly attributed to DB plans’ ability “to incorporate investment strategies that are harder to implement within the DC operational structure.”
The report and Elliot both propose an interesting alternative to the one-size-fits-all QDIA decision. What if plans could segment participants and default them to different investment options by using a demographic profile, for instance? This is currently a hot topic among consultants and sponsors, says Elliot. “So, could I put all my new hires and younger folks into the target date fund but then on an annual basis, anyone that meets these certain criteria of age, assets and complexity, I’m going to actually default them into a managed account?” he asks. “I feel like consultants are starting to focus a little bit more there: Can they help a sponsor decide whom they might default into a managed account versus whether it’s appropriate for the plan or not just to offer (a managed option)?”