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Growth in Managed Accounts Reflects Growing Desire for Customization

The time is right to focus on an emerging trend that directly impacts participants. The last few months, we wrote about cybersecurity, litigation, and more litigation. Those issues certainly impact participants – particularly those benefiting from proactive fiduciaries – but not to the same degree as the explosion in managed accounts. We suspect this issue will merit more conversation over the next couple of years, but here’s a good place to start.

Striking the Right Balance. Retirement plans require a delicate balance between customization and uniformity. If a plan sponsor caters too much to an individual’s requests, the plan becomes harder to administer and potentially more expensive. If a plan sponsor deploys a mere cookie-cutter approach, it sacrifices employee engagement and appreciation. And of course, the plan sponsor must examine these choices from multiple perspectives, including the current regulatory environment and an eye toward future risk mitigation.

Race to Zero. The Pension Protection Act of 2006 (the PPA), the resulting increased transparency, and more than a decade of accelerating retirement fee litigation caused what many call the “race to zero”. Many plan fiduciaries – not all, but many – succumbed to pressure to offer a plan as cheap as it could be, with the focus more on driving costs low instead of driving value high. While that approach may limit a company’s risk on paper, it also limits participants’ potential. In turn, the “race to zero” term could be interpreted to reference the race to zero fees, liability, engagement, appreciation, value, or some combination thereof.

Growth in TDFs. This all occurred against the backdrop of another, more fortunate trend: participants began to embrace “do-it-for-me” solutions. They began to see data reflecting that most – not all, but most – participants’ retirement accounts perform better when managed by a professional. They moved from a “build my own static portfolio from a long list of funds” approach to age-based target date funds (TDFs). The PPA had positive effects on fiduciaries’ risk levels by providing “qualified default investment alternative” or “QDIA” safe harbor protections to amounts invested in TDFs. It also had positive effects on participants’ savings rates and account balances by providing more professional money management without the need of a brokerage window.

More than Age. In recent years, the continued shift to TDFs has been accompanied by the increased use of risk-based portfolios. TDFs seek to provide portfolio management that reflects a participant’s current age and becomes more consistent as the participant nears an expected retirement date. Risk-based portfolios reflect that a participant’s age, alone, is not enough to address other factors determining the suitability for an individual, including not only his or her time horizon, but also his or her tolerance for volatility and expectations for portfolio performance in various market conditions.

The Next Iteration. Risk-based portfolios fit somewhere within a broader category that has gained broader acceptance: “managed accounts”. For years, recordkeepers have worked with outside parties (familiar names like Morningstar, NextCapital, and Stadion) to build out capabilities to provide a participant solution that feels much more “goal-based” because of the systems’ ability to pull in more information than a risk assessment provides (and certainly more than simply a participant’s age).

One could easily say that managed accounts reflect the evolution from pick-from-a-list, to age-based, to risk-based, to goals-based. For those familiar with Gap Analysis reports and recordkeeper calculators, one could also see managed accounts as the combination of the investment- and savings-focused tools currently operating in isolation.

“Advisor” Managed Accounts. The demand for managed accounts has exploded for a couple of distinct reasons. First, the COVID-19 pandemic highlighted participants’ demand for customization when it comes to their retirement savings. Second, recordkeepers have expanded their relationship to involve plan advisors in the management and support of managed accounts. They now refer to “Advisor Managed Accounts” or “AMA”, which commonly feature the advisor acting in a fiduciary capacity and helping employees to experience interaction with a person (rather than a phone bank and website).

What’s Ahead? The race to zero isn’t over. In fact, for many, the United States Supreme Court’s opinion in the Northwestern University case (on which it will hear oral arguments in the fall) may accelerate the race for some.

At the same time, many proactive employers are taking a fresh look at their employees’ retirement plan experiences. They’re looking for better online tools, more person-to-person financial wellness coaching, and a system that permits employees to further customize their experience. At QPA, we are excited by the AMA developments because they will allow us to grow the value of our historic risk-based investment and savings-strategy services. The recordkeepers and third parties have developed slick tools that will help to serve participants, and we anticipate plan assets will continue to shift to target date funds and managed accounts. More to come!

Matthew Eickman
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