Plan governance What plan fiduciaries need to know about implementing managed accounts

The Pension Protection Act of 2006 (PPA) and subsequent regulations approved managed accounts as an available qualified default investment alternative (QDIA), but that’s not the real story that gives rise to the evolution of managed account programs in defined contribution (DC) plans. Shortly after PPA and the boom of automatic enrollment in plans, target date funds (TDFs) won the day. Between 2006 and 2015, target-date assets under management (AUM) grew nearly ninefold, from $118 billion to over $1 trillion, including collective investment trusts (CITs).¹ Indeed, TDFs, with their singular focus on a date of retirement, were “easy” for employees to understand and delivered largely what the market desired. However, technological advances are now making it possible for more personalized solutions, notably managed accounts. This update will cover what managed accounts are, discuss why both plan sponsors and participants are increasingly embracing them, and offer some practical steps for implementing managed account programs.

Managed account overview 

Managed accounts are a service — not a product — that provides discretionary investment management tailored to each participant. Unlike TDFs, which base allocation solely on age, managed accounts use inputs like income, savings rate, gender, and outside assets to create a personalized retirement portfolio. With minimal participant involvement, portfolios are automatically adjusted over time rather than offering one-time advice.

These programs can be delivered through a recordkeeper or a third-party registered investment advisor (RIA) in a program called Advisor Managed Accounts (AMAs). While both AMAs and traditional managed accounts are offered via RIAs, the delivery method and accompanying services may differ. AMAs, often provided by the plan’s investment advisor through platforms like Morningstar, may also include holistic financial planning.

For both traditional managed accounts and AMAs, the key advantage is customization. Unlike TDFs, which treat all same-age participants alike, managed accounts adapt to individual circumstances. For example, two 40-year-old attorneys — one a married mother of three at a large firm, the other a single small-business owner — would receive identical TDF allocations, but vastly different managed account strategies.

While fees are often cited as a drawback, the focus should be on value. Under the Employee Retirement Income Security Act of 1974 (ERISA), fiduciaries must assess whether the service delivers sufficient value for the fees, which must be “reasonable.” Though managed account fees are typically higher than TDFs, they cover both the service and the underlying investments — and fees have been trending downward. 

Demand for managed accounts

Participants are not only accustomed to personalization, they expect it in everything from their iPhone experience to their Starbucks order to their Amazon recommendations. Little wonder that participants today also expect that level of support and awareness in their retirement plan experience. Recent studies show that participants feel more confident when they have the support of a professionally managed service. According to Cerulli, participants using managed accounts are nearly three times more likely to feel “very confident” in their retirement strategy (47% vs. 16% of non-users).²

Given this, plan sponsors are increasingly making managed accounts available to participants, with approximately half of plans now doing so.³ 

• Why? The top two reasons plan sponsors make managed accounts available are to offer situational financial planning services and to help participants with retirement income.⁴ 
• How? Most plans — approximately 95% — still only make managed accounts available on an “opt in” basis rather than as the QDIA.⁵

How managed accounts work in the investment menu

Having a managed account program isn’t mutually exclusive with a TDF. In fact, for many participants and plans, both TDFs and managed accounts may live together harmoniously on the investment menu. When thinking about how to incorporate managed account programs into the investment menu, there are different options which may vary depending on a variety of factors, including but not limited to: 

• Plan and participant needs: What are the investment-related needs of the participants; what is the sophistication level of the participants; what level of engagement will participants have with the investment options; how varied are the participant demographics; how suitable for those demographics are the existing TDF glidepaths?
• Platform availability: What options are currently available on the recordkeeping platform and is the plan able/willing to move recordkeeping platforms for a different option? 
• Fiduciary selection process: Is the investment advisor/consultant or the plan sponsor making the fiduciary selection for the managed account program; who is selecting the underlying investments and will they include core investments of the plan or extend beyond the core investment options to include private markets or other exposure?

These factors may influence the way the managed account program is included on the menu, and it may change over time. Consider the following spectrum of options for how a managed account program may be included on the investment menu: 

• Opt-in method to sit alongside other options such as a TDF: The plan may still have the TDF or another option as the QDIA but also have a managed account program for those that desire a more personalized solution. Participants can opt in to the managed account and, typically, only those individuals that opt in will pay the fee for the managed account program. 
• Dynamic QDIA (DQDIA): Instead of a full QDIA (discussed next) an interim step is an arrangement where newly enrolled, typically younger participants are invested in a TDF until they reach a specified age (for example, age 50 or 55) where they are — with notice, and an opt-out option — shifted to the managed account option as their circumstances and investment needs are typically more diverse. 
• QDIA: The managed account program serves as the plan’s QDIA when a participant does not otherwise make an election; unlike the dynamic QDIA, the managed account program is the QDIA for all plan participants.
• Re-enrollment as a QDIA: Rather than rely on participant election, some plans are now conducting a “re-enrollment” into the managed account option at a specified future date so that all participants are enrolled in the managed account program with the ability to opt out. Participants are notified and a communication campaign is conducted to ensure awareness; this option generally results in the greatest increase in managed account participation.

Prudent framework

For ERISA-covered retirement plans, adding a managed account program is the selection of an investment service provider. This is a fiduciary decision, which should embrace the same type of process used in selecting the plan’s investment advisor or consultant.⁶ The prudent fiduciary will decide not only whether to add a managed account but also how to implement the program per the various options noted above.

In developing a consistent, repeatable fiduciary process to select a managed account provider, plan fiduciaries should consider — both initially and on an ongoing basis — the following, including but not limited to: 

• Experience and qualifications: The managed account firm’s experience and track record with managed account offerings, total AUM in managed accounts, and team handling managed accounts, as well as their experience with similar-sized plans and employee demographic audiences.
• Registration and fiduciary status: Confirmation of SEC registration in good standing (Hint: check SEC filings including Form ADV Part 1 and 2A). 
• Service provided and associated fees: Review the firm’s methodology, asset classes included, and whether the program includes core versus non-core options, including the potential to include alternative assets (if desired); breadth of the services offered, including whether financial planning is included; reporting and oversight for the services leveraged; fees and associated value for such fees. 
• Level of personalization provided: How many data elements are available and leveraged by the managed account program?
• Potential conflicts of interest: Any actual or perceived conflicts of interest; any threatened or actual litigation; any pending or recent regulatory actions, penalties or investigations. 

While not an exhaustive list of criteria, these can jumpstart plan fiduciaries’ framework for initial selection and ongoing monitoring. However, you may have heard that the highly personalized nature of managed accounts poses a risk because they can’t be readily benchmarked. However, there are still ways to document a comparative value that is received, which is what ERISA requires given that plans are to pay only reasonable fees under ERISA Section 404. By comparing the value of one managed account program to another managed account program — which includes evaluating both services and fees — the prudent fiduciary can meet this requirement. If there is only one managed account available on the recordkeeping platform, prudent fiduciaries should compare to other managed account programs on other platforms — including both AMAs as well as traditional managed account programs. 

Practical considerations and next steps for plan fiduciaries

For plan fiduciaries looking to take their investment menu to the next level through personalization, consider these steps and determine how to work with a partner to implement for your plan. 

• Understand and educate: Plan fiduciaries should understand what managed account programs are and how they may benefit the plan and its participants. Be aware that the label “managed account” has been broadly applied to a wide variety of service offerings — and take care to understand exactly how the program(s) under consideration differ. 
• Assess: Determine the needs of the plan and its participants to understand how the current investment options are leveraged and if there is an ability to improve outcomes through a managed account program. Keep in mind the managed account program may be a substitute — or a complement — to an existing option. 
• Evaluate: If the plan fiduciaries determine a managed account program may be appropriate, develop a prudent ongoing review process and evaluate options. Update the investment policy statement or other governance documentation, evaluate the options within that framework, and document the process. 
• Select and Implement: Select and implement a managed account program. Communication with participants is a key component of the program and may vary based on whether the managed account program will be the QDIA, a DQDIA, and whether non-core plan investment options will be included. 

i. Hint: If non-core options such as private markets will be included, some participants may require additional education. 

ii. Hint: If there will be a QDIA re-enrollment, keep in mind that while there is only a limited number of required communications, participants will greatly benefit from optional communications in a more comprehensive communication strategy that can aid them in understanding the process.

• Monitor over time: Whether the plan implements a managed account program or not, over time, plan fiduciaries should continue to monitor the needs of the plan and its participants, as well as evolutions in the DC marketplace. While there is no right or wrong answer for whether the plan determines managed accounts as an appropriate fit, recent data does show that when looking at the percentage of managed account users by age, 39% are under 40; 36% are between 40 and 55; and only 25% are over 55.⁷

Managed account programs have evolved over time and include a range of core and non-core options for prudent fiduciaries to consider. To learn more, engage your partners and determine what next steps may be appropriate based on the needs of the plan and its participants.