Managed Account Use Poised to Jump in 401(k) Plans

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By David B. Brandolph

Mergers of 401(k) record keepers, such as the combination of Great-West Financial, Putnam Investments and J.P. Morgan Retirement Plan Services into Empower Retirement, are part of the equation that’s driving an increase in the number of employers offering managed accounts in their plans.

That’s according to David O’Meara, senior investment consultant with Willis Towers Watson LLP, in New York. These mergers have increased the choice of managed account providers on plan platforms, he said. Technology innovations that allow managed accounts to automatically incorporate individual investors’ data in constructing advice are also a driving force behind renewed interest in managed accounts, O’Meara told Bloomberg BNA.

Managed accounts allow investors to receive customized and ongoing asset allocation advice. Advice in these accounts are most often computer generated but can involve consultations with a financial adviser. Investors who select managed account options tend to be older and with larger account balances. They pay more for the service, up to 50 basis points (.5 percent) or more per year. Although the numbers are increasing, only a small percentage of 401(k) investors select managed accounts as investment options. Vanguard has reported that only 4 percent of investors using its 401(k) investment platform use them, while Great-West Investments says between 10 and 15 percent of participants in plans it serves have elected such accounts.

Another factor that has kept investment in managed accounts low is that 401(k) sponsors don’t often use them as the qualified default investment alternative--that is, the investment participants get if they don’t pick their own investments. The vast majority of sponsors use target date funds as QDIAs.

“Low use by plan sponsors of this option as QDIAs” has led to the low use of participants taking advantage of them, David Blanchett, head of retirement research at Morningstar Investment Management LLC in Chicago, told Bloomberg BNA.

Both TDFs and Managed Accounts

There’s now been a shift as major record keepers, including Empower Retirement and Fidelity Investments, recently rolled out programs that allow sponsors to use both managed accounts and TDFs as QDIAs.

“Having such an option offers participants the best of both worlds—a TDF for the earlier stages of their carrier and a tailored solution that will be more helpful in the later stages,” David L. Musto, president of Great-West Investments in Denver, told Bloomberg BNA. Musto said that since his firm launched its Dynamic Asset Manager in February, it has had active conversations with at least 10 plan sponsors that are currently considering implementing it as the plan’s QDIA.

There’s also been interest in Fidelity’s QDIA managed account program, launched in March. Fidelity has received numerous inquiries from several plan sponsors who are interested in exploring this option, Sangeeta Moorjani, head of workplace managed accounts at Fidelity in Boston, told Bloomberg BNA in an email.

When it launched this program, Fidelity said that managed accounts have become much more popular among plan sponsors and participants. According to Fidelity, it added more than 750 plan sponsors to its managed account business at the end of 2016, up 16 percent over the prior year. In addition, it said that enrolled participants in its managed account service grew 26 percent in 2016 to 300,000. Fidelity said that was five times the number of enrolled participants it had five years ago.

Engaged Participants to Benefit Most

Participants who are engaged with their plan accounts--those that provide additional personal data to the account--are likely to be the ones who will benefit most from managed accounts.

Matt Brancato, principal and head of product strategy in Vanguard’s Portfolio Review Department outside of Philadelphia, told Bloomberg BNA that using a managed account-QDIA for the majority of participants who aren’t so engaged wouldn’t be cost effective.

O’Meara agreed that managed accounts are particularly valuable for engaged participants with complex financial situations. If participants aren’t engaged or don’t have much in the way of assets, managed accounts don’t offer much more than a high-cost TDF, he said.

Although O’Meara believes managed accounts can be valuable for participants, he said that for them to become generally accepted by sponsors as QDIAs, they will likely need to see their costs come down. In addition, he said they should offer unique asset classes that aren’t offered to other plan participants, such as alternative investments. They will also become more valuable as they help participants determine the most appropriate allocations to lifetime income options, he said.

To contact the reporter on this story: David B. Brandolph in Washington at

To contact the editor responsible for this story: Jo-el J. Meyer at

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