Managed Accounts are gaining respect among the plan sponsors looking for a more personalized Qualified Default Investment Alternative (QDIA). Target date funds have been the (QDIA) of choice in retirement plans for decades. It may be time to rethink that.
A new article from Report Door, a domestic and international news site is aimed at retirement plan participants. However, the principles apply to plan sponsors and retirement plan committees as well.
The practice of using target date funds (TDFs) as a go-to QDIA is not new. It’s a topic that’s been hotly debated for several years. According to the EBRI/ICI database, there’s no question about TDFs’ popularity. TDF’s account for $1.4 trillion in retirement plan assets, or 27%, invested in TDFs as of year-end 2018. In fact, more than half of the 60 million participants in the database held TDFs at that time.
However, TDFs’ one-size-fits-all approach may not actually suit everyone. This may be especially true as retirement plan participants get older and closer to their anticipated retirement date. TDFs have a predetermined glide path that often shifts to a more conservative investment allocation as participants approach retirement. Unfortunately, TDFs do not account for an individual’s unique appetite for investment risk or their individual goals. A TDF cannot account for other assets they may have – such as a spouse’s assets, savings in an individual retirement account (IRA), or another employer-sponsored retirement plan.
If not TDFs, what should plan fiduciaries consider using as a QDIA? If your retirement plan offers a managed account investment solution – that may be a better option, according to some experts. Managed accounts offer a personalized advice component and customized portfolios made up of funds already in the plan. The asset allocation is also personalized to individual participants’ investment objectives and preferences.
Still, participants appear hesitant to use managed accounts. Just 5% currently do so, according to the Report Door article. However, part of this may simply be lack of awareness.
Retirement plan advisors also think highly of managed account solutions, and actively encourage their use. Managed accounts have advantages and disadvantages, and it’s important to help participants understand those too. For instance, one reason for the poor uptake of managed accounts, is participants are often deterred by the cost. Managed accounts typically charge 0.40%-0.60% on top of the underlying fund fees, according to an AON report cited by Report Door. However, those fees may be worth it for the personalized advice. Such advice could cost upwards of 1% of assets outside of a 401(k) plan, Report Door noted.
In addition, managed account options are becoming more prevalent in the marketplace. There may be some important synergies between managed accounts and financial wellness programs.
Participants who are nearing retirement have always been the most likely candidates for managed accounts. Given the complexity of the financial planning decisions participants must make when they reach that stage of life, having access to personalized investment advice and the ability to customize their asset allocation according to their preferences can be key. Mid-career participants can also benefit from shifting from TDFs to managed accounts for similar reasons.
When it comes to retirement readiness, managed accounts may be an excellent option for plan sponsors to consider. The good news is, managed accounts can be offered “in addition to” rather than “instead of” TDFs. That gives retirement plan committee fiduciaries the opportunity to provide participants more flexibility and choice when it comes to their savings.
Steff C. Chalk is Executive Director of The Retirement Advisor University, a collaboration with UCLA Anderson School of Management Executive Education. Steff also serves as Executive Director of The Plan Sponsor University and is current faculty of The Retirement Adviser University.