Managed accounts emerging on the 401(k) scene for plan sponsors

Managed accounts are emerging on the 401(k) scene for plan sponsors, but not everyone believes these funds are a panacea for employees. The Government Accountability Office released a report this summer that pointed out a variety of areas for providers to improve — for instance, fees can range from $8 to $100 on every $10,000 in a participant's account. The agency also took the Labor Department to task for not requiring providers to share performance and benchmarking data for managed accounts. But popularity of managed accounts — which enable plan sponsors to use portfolio customization in an effort to improve employees' retirement savings — is on the rise. An alternative to “set it and forget it” target-date funds — a mainstay of many plan fund menus — a number of firms are creating customized portfolios for retirement plan participants based on the standalone funds already available in a 401(k)'s menu and savings data gleaned from a plan's record keeper, or from employees who are interested in signing up. Often these managed account pro-viders act as a fiduciary investment manager under Section 3(38) or as an investment adviser under Section 3(21) of the Employee Retirement Income Security Act of 1974, giving workers access to professional management services.

PROFESSIONAL MANAGEMENT

“The main phenomenon is generally recognized by employers and employees that they can't do it themselves,” said Sangeeta Moorjani, senior vice president of Fidelity Investments' professional services group and head of the company's workplace managed accounts business. “Plan sponsors adding managed accounts is another way to put [workers] on the right path for retirement.” Indeed, managed ac-counts are growing, according to the latest data from Cerulli Associates Inc. The top eight defined-contribution managed-account sponsors had almost $163 billion in assets in the second quarter, up from $124 billion and $93.5 billion in the same period of 2013 and 2012, respectively. Financial Engines accounted for the most market share for the second quarter of this year, with $98.4 billion in assets, followed by Morningstar Retirement Advice with $36.8 billion, and GuidedChoice and Fidelity Investments next, each more than $9 billion, according to Cerulli. Providers in the managed account space welcomed the GAO's calls for transparency, but pointed out the unique difficulties of benchmarking the investment performance of these services. “It's not a matter of performance but of the appropriate asset allocation for the individual using all the data points they know,” said Steve Anderson, head of Schwab Retirement Plan Services. “It's tough to come up with a benchmark that is specific to you.” Disclosure and benchmarking might not be a problem for providers who base a managed-account service solely on the funds in a 401(k) menu, as those funds are already supposed to have that disclosure, noted Jason C. Roberts, CEO of Pension Resource Center. Rather, the problem is when the managed account pulls in a fund that isn't on the plan's menu, a scenario Mr. Roberts calls, “the eleventh fund,” or when a discretionary investment manager is the one overseeing the managed-account service and some of the funds aren't in the menu. “What's the level of disclosure we need?” Mr. Roberts asked. “What about the underlying expenses or performance information?” These are issues the industry will have to weigh if the DOL requires a higher level of disclosure for managed-account services. At Fidelity, retirement plans need to have the appropriate standalone fund lineup in order to partake in the managed account service, Ms. Moorjani noted. Fidelity provides composite benchmarking based on what's in a typical menu lineup and uses that when reporting for its managed-account service. A program, Portfolio Advisory Services at Work, allows corporate clients to use managed accounts in their 401(k)s. As of June 30, 123,000 participants were enrolled in Portfolio Advisory Services at Work, up 30% from the 95,000 in the program in 2013. A major shortcoming of managed account services in retirement plans is their lack of accessibility to the rank-and-file workers, noted Ron Surz, president of Target Date Solutions.

IMPROVEMENTS

“The version of managed accounts that works best is pretty expensive and reserved for the executives of the company,” he said. “There's the version for the masses that may be less expensive but generally isn't used.” There are also other ways for these services to improve. For instance, ensuring workers' data outside of the plan is incorporated into the guidance from the service. “The optimal way is one-on-one, and it's hard to make that work on a cost-effective basis,” Mr. Surz said. “You have to get your arms around the other savings, needs and wants, and most importantly, the feedback on whether you're saving enough.” A comparison of managed-account providers will require more than just benchmarking, considering services will vary from one firm to another, Ms. Moorjani said. That will require plan sponsors to use other metrics to weigh different providers: Where do workers stand when it comes to retirement readiness if they were to use these -services? “It's important to make sure that [a provider] can provide the risk control factors: Is the employee taking too much risk? Is the person saving enough?” Ms. Moorjani asked. “With managed accounts, it's more broadly defined than benchmarking investment performance,” said James Smith, vice president of client solutions at Morningstar Investment Management. “It's not just asset allocation and fund-specific allocation but the overall income goal. Are you getting to that goal?”

DIFFERENTIATOR

The use of managed-account services can help financial advisers working with retirement plans distinguish themselves from other advisers. “The best advisers are using participant advice as a way to win business,” said David Reich, executive vice president of retirement platform development at LPL Financial. In the arrangement the firm has with Morningstar Associates, advisers talk to employees about their goals, while Morningstar creates a personalized portfolio for the worker. “It's a great value proposition to say that you have something that gets employees to better outcomes,” Mr. Reich said.