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INVESTMENT FOCUS
(bps) of participants' assets annually, on
top of fees charged on the underlying
assets. Five or six providers offer managed
accounts that the consultants interviewed
for this story consider relevant, although
any given recordkeeping platform may be
limited to just a couple.
Some managed account providers,
says Hockenmaier, take a plan-wide
approach, drawing on a plan's investment
options to develop an array of
predetermined portfolios. " Then, based
on information from participants, they
match individuals to one of the portfolio
designs, " she explains.
" Others have a more personal and
nuanced approach and construct portfolios
for individuals based on the risk and
return profiles of the plan's fund options, "
she says. " So, it's important to understand
the managed account provider's investment
philosophy and process, ensuring
it's congruent with what the sponsor
believes is appropriate for the participants
and it lines up with the recommendations
and results the participants are getting. "
" Managed account providers have
biases on what makes a properly diversified
portfolio, so sometimes the sponsor
is surprised to see that they may not be
using all the asset classes it has carefully
chosen for its menus, " says Ross Bremen,
a partner at consultant NEPC in Boston.
" But that's the judgment the sponsor is
paying for. "
According to Hockenmaier, also
essential is the nature of interaction
between the account provider and the
participants: " understanding how investment
risk is being communicated, what
personal information participants are
being asked for and how that will be used,
and the output the provider generates for
any one participant. "
Brian Cosmano, vice president of
strategic product initiatives at Great-West
Investments in Denver-and author of
a recent, exhaustive paper on assessing
the value of managed accounts-distinguishes
the accounts' services based on the
type of information they gather to tailor a
portfolio. " Do they look at the participant's
risk tolerance, or at his financial situation?
Risk tolerance will be assessed through a
questionnaire and will be personalized,
but less so than in a financial situation
assessment, which takes more factors into
account-an individual's assets and any
sources of guaranteed income. "
Scoring the results that managed
account programs achieve is complicated,
as well. " In the accumulation phase,
benchmarking is pretty straightforward
on conventional investment performance, "
Bremen says. " But the people who really
need [these accounts] are those in the red
zone, and success there is more difficult to
measure. We can compare fees across the
different managed account products, and
the fees on the underlying investments,
but, as a matter of course, these are not
packaged investments. Managed account
providers make their own assessments
based on asset accumulation and projections
for income replacement, but it's hard
to know how the managed accounts have
performed versus other investments. "
Participants' uptake on managed
accounts has been modest. In Vanguard's
client base, over half of participants are
offered one, but of that group just 7% have
come on board. " We encourage sponsors
to add them as a supplemental service,
where [participants] want a more tailored
approach to their savings and investment
decisions than they would get from a
target-date fund, " Utkus says.
For the typical red zone audience,
managed accounts can be an expensive
proposition. An annual fee of 40 basis
KEY POINTS
* There are specific populations that call for the portfolio customization
that managed accounts can provide.
* Providers may have certain biases on portfolios-which is what a
participant is paying for-but it is important to understand their investment
philosophy and process, then ensure these are reflected in the
recommendations and results the participant is getting.
* Managed accounts may be associated with greater costs, but they
may bring value to even those of modest means.
PLANSPONSOR.com April-May 2018 81
points (bps) levied against a $1 million
balance comes to $4,000 a year. Utkus
says people with such meaningful
amounts may have other investments
already guided by an adviser and not need
advice from their retirement plan.
However, managed account services
may provide better value to participants
approaching retirement with more modest
means-despite the fees. " Retirees should
prioritize the goals that are most important
to them ... and then construct a portfolio
of retirement income that increases
the odds of successfully meeting their
goals, " write pension scholars Wade Pfau,
Joe Tomlinson and Steve Vernon in The
Journal of Retirement - Fall 2016 issue.
" Many workers preparing for retirement
may find this to be too daunting as a do-ityourself
project and may need professional
advice. Employer support or other low-cost
planning options can play a vital role. "
Bremen points out that, while the
retirement industry has been innovatively
active in broader financial wellness-
helping participants manage budgets, pay
off credit card and student loan debt-it
has done little to evolve managed account
services. " There has been talk of doing
more in the decumulation phase-
deferred fixed annuities, for example-but
for the most part these products have not
changed dramatically, " he says.
" The future evolution of managed
accounts could make them a more valuable
service, " says Utkus. " The fee would be
justified by greater personalization and by
a broader set of capabilities. And providers
are working on that. " -John Keefe
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