Several trends in the defined contribution market are likely to propel a greater interest in managed accounts, according to a new report by Cerulli Associates.
“Growing emphasis on financial wellness, concerns about lack of retirement income options within employer-sponsored plans, increasing customization for the participant, and fiduciary concerns could spur additional growth in managed accounts,” the firm says in its first quarter 2019 issue of The Cerulli Edge—U.S. Retirement Edition. A deterrent, however, could be the 401(k) market’s sensitivity to fees.
According to the firm’s data, the managed account category within the DC market has experienced solid growth in recent years, with total assets growing from $108 billion in 2012 to $271 billion in 2017.
Addressing Specific Cohorts
One area that managed accounts may increase their prevalence is within existing DC plans. This would be primarily in a non-QDIA capacity through targeted campaigns to specific cohorts of participants, with emphasis on their position as a “holistic solution with access to advice,” the report explains.
As such, Cerulli sees an opportunity for managed accounts to increase DC assets and marketshare by emphasizing their ability to better address the complex financial lives of older participants. The firm estimates that there are nearly 20.8 million households ages 45 to 69 with between $100,000 and $2 million in investable assets, where close to 60% of their investable assets are in retirement savings.
“They are at an age when retirement is no longer a far-off and abstract concept and they have enough assets to be profitable from the managed account provider perspective, but are not so affluent that financial advisors would pursue them,” the report observes. In addition, Cerulli notes that, as participants get closer to retirement age and achieve greater account balances, their risk-tolerance level skews toward protecting accumulated assets, which may require greater customization than that of a target-date fund.
And one of the primary benefits of a managed account solution is the ability to reflect a more comprehensive and customized view of an individual’s financial picture and consider non-retirement assets, Cerulli emphasizes. In fact, target-date managers believe that managed account providers will become greater threats in the years ahead, according to Cerulli research.
End-to-End Solutions
Moreover, the firm notes that, with the corporate DC market in negative net flows, some plan sponsors and intermediaries seek investment solutions that can better position the workplace savings plan as a decumulation vehicle.
For plan sponsors that seek to retain the assets of retired/separated participants, there must be an in-plan retirement income solution available, according to Cerulli. “As one of the largest managed account providers notes, ‘Plan sponsors are looking for an end-to-end solution for participants,’ or, a single portfolio solution that can guide them through accumulation and decumulation,” the report states.
And given the increased complexity of the decumulation stage, participant access to advice is an important part of managed accounts’ value proposition. Moreover, data from a 2018 Cerulli survey of 800 401(k) plan sponsors shows that nearly 40% of plans that currently offer managed accounts do so because they “help participants with retirement income.”
“While the 401(k) market continues to puzzle over how to best structure in-plan retirement income solutions that are insurance-based (e.g., deferred income annuities, qualified longevity annuity contracts), managed accounts are quietly progressing as a less controversial option for plan sponsors to offer participants,” the report emphasizes.
Non-QDIA Capacity
As to the possibility of plan sponsors selecting managed accounts as their QDIA, Cerulli believes it is unlikely that there will be a spike. “401(k) plan sponsors are keenly aware of cost and can hesitate to offer participants what appears to be an expensive option relative to other investments,” the firm says.
What’s more, this price sensitivity is “especially acute” for a plan’s QDIA in which participants are defaulted. While ERISA does not mandate that fiduciaries select the cheapest investment option but urges plan fiduciaries to assess fees in terms of the value of the services provided, the reality is that plan sponsors often make decisions based on cost. “From this perspective, it can be argued that while managed accounts are generally more expensive when solely comparing fees, they provide additional services for participants, and, therefore, could offer greater value for the fee,” Cerulli emphasizes.
Litigation, however, has made plan sponsors “leery and cautious of looking different from their peers,” which is another reason Cerulli believes it is unlikely that there will be a spike in plan sponsors selecting managed accounts as their QDIA.
