PLANSPONSOR - October-November 2022 - 23

INVESTMENTS |COVER STORY
you can look at your employee demographics and ask, 'How do
these managed accounts fit our employee population? Does this
service give them a degree of personalization they need?'
" The other thing to consider is, 'How do the asset allocation
models work?' " he continues, referring to a provider's methodology
for implementing a participant's individualized asset allocation.
" What data points about the participant [does the provider]
look at in making that decision? And are there a number of
models, or one standard model the provider uses? " In other words,
how much personalization actually happens with a participant's
portfolio allocation, and based on what decision criteria?
As to how detailed an investment policy statement should
be for fiduciaries' process for selecting and monitoring
managed accounts, " There's no prescriptive requirement that
investment policy statements be long, " he says. " If managed
accounts are the QDIA, depending on [their] structure, [they]
may or may not be considered an 'investment' [versus a service]
by a fiduciary or service provider. Whether or not there's detail
in the IPS, fiduciaries can benefit from having a process for
selecting and monitoring the managed account provider. " An
IPS might have specific language about a client's process if
managed accounts are the QDIA, but it is often not that comprehensive,
he says.
Understanding Portfolio Allocations
When it comes to the value of personalized asset allocations,
those from the mainstream managed account providers typically
have many similarities-but also some differences, says
Michael Esselman, vice president of investments for OneDigital
Retirement + Wealth in Atlanta. " It's like the way different targetdate
fund families have a similar glide path-they start with a
higher percentage of equities and end with a lower percentage-
but, [besides] that, they differ with the implementation, " he says.
It is important to understand the provider's philosophy for
how it chooses a participant's portfolio: Depending on whether
the person is overfunded or underfunded on retirement savings,
will he be placed into a more-aggressive portfolio or a lessaggressive
one? Esselman says. " There's a valid argument for
both those approaches. So a plan sponsor and adviser ... should
understand where that provider is different from other providers
in how it does the allocations and where it is similar. "
Kevin Toledano, director of managed account services at
Qualified Plan Advisors in Houston, agrees that sponsors should
find out the basic methodology by which a participant gets
assigned to a particular allocation. They should ask what would
prompt the provider to move someone up or down the glide path,
to change his exposure to risk. If the person decides to retire
earlier than typical retirement age, for example, how does that
affect the allocation he will get? " These are easy things to ask
about, and if you can't get reasonable answers, then that raises
additional questions [about selecting that provider], " he says.
Evaluating an allocation methodology has several components.
" You want to understand, what are the [participant] data
points the provider is [using] to do the allocation? " Esselman
says. " How does each affect whether the amount of equity
increases or decreases? And when the provider doesn't have an
actual data point for a participant, what is the assumption it uses
for that data point? "
It is also helpful to know whether a managed account
provider can adjust a participant's allocation based on supplemental
information the participant shares, such as about her
financial goals for retirement. " Does this managed account
program focus on meeting an individual's goals most efficiently
and effectively? " Esselman says. " Some managed account
providers are better at allowing people to incorporate their
outside goals, and others aren't. "
Participant Service Differentiators
Managed account services are evolving from a primary focus on
just the asset allocation to the allocation plus a widening array
of participant services aimed at improving retirement readiness,
Toledano says. Giving personalized recommendations about
Social Security optimization and the most tax-advantaged way to
withdraw retirement savings are among those most commonly
offered today, " to help participants with 'Here's how you make
your nest egg last longer,' " he says.
Some providers go beyond that, to recommending, for
instance, how a participant should prioritize different types of
savings-e.g., retirement vs. emergency savings.
A plan sponsor can evaluate not just the value of a particular
participant service but how the provider delivers this and other
services to participants and whether that method will work well
for the sponsor's participant base, Toledano notes. " You've got
some that are purely digital, some that have added an online chat
feature, some that have good phone [call-in] services available,
and some that have human beings a participant can talk with on
a video chat or who come, in person, to an employer, " he says.
Esselman sees differences in the participant services
available now vs. a few years ago. " I think that will continue to
accelerate relatively quickly, " he observes. For example, some
managed account providers now have a call-in center where qualified
staff can give fiduciary advice to a participant. Technology
plays a big role with most participant services for managed
accounts, " but that secondary, human element is an area where
we're seeing more services start to pop up, and that can be a real
benefit for participants, " he says. " Is that worth another 2% in
fees [compared with other QDIA options]? Probably not. Is it
worth another 0.5%? Maybe. "
Once the sponsor chooses a provider, the most important
thing to benchmark regularly for managed account services
is whether the retirement readiness score or projected income
replacement ratio of participants in a managed account has
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