The adoption of professionally managed allocations inside employer-sponsored retirement plans has seen steady growth over the last decade, and there are indications that the adoption will continue to increase in the coming years. Over the past decade, managed account technology has improved significantly, and customization has made them more personal.
Recordkeepers can also use different levers to increase the adoption of these services inside plans. They often use pricing concessions on plan-level recordkeeping fees to get these products into plans. Using managed accounts as the plan’s qualified default investment alternative (QDIA) usually results in more significant recordkeeping fee concessions. With many recordkeepers charging a half percent or more for managed accounts, it is easy to see why there has been a push to get them into plans as an option and why a recordkeeper would discount their general fees to get these into the plan.
Should you use managed accounts as your plan’s QDIA? Before you begin exploring the pros and cons of a managed account, I think you may find the answer by simply understanding the typical participant in your plan’s QDIA. By simple definition, someone who falls under the plan’s QDIA has been “defaulted” into the plan. They defaulted because they were not fully engaged during enrollment and did not select an investment election.
Managed accounts are often marketed as “better” for participants in the long run, and their outcomes (investment return and savings rates) are superior to DIY and target-date investors. However, to fully experience the “better” outcomes, a participant needs to supply additional data inputs (household data, outside plan assets, expected retirement date, etc.) to make the service and investment allocation more effective.
If most of your QDIA participants are, by definition, not fully engaged and are not supplying the additional data needed to maximize the managed account services, then is the extra half percent, or more, in fees worth it to essentially have an enhanced target-date investment? A target-date fund is age-based. A managed account without additional inputs is primarily age-based, along with salary and account balance (limited to what is transmitted in the payroll file). Do these two or three additional data points of an unengaged participant enhance outcomes and improve performance enough to justify the extra cost relative to a low-cost target-date investment? If the answer is a likely “no,” you have your answer. If the answer is “maybe” or “yes,” then the recordkeeper can hopefully supply data to support this, and the plan’s fiduciary committee can then review the pros and cons of managed accounts and make a final decision.
In summary, it is one thing for an engaged participant to opt into this service proactively. They’ve made their own informed decisions. I think managed accounts have potential and look forward to their continued evolution. However, defaulting unengaged participants into this service is a fiduciary decision that should be viewed critically. If data on defaulted participants prove otherwise, or if participant-supplemented data collection methods evolve, then it would be prudent to consider those when making this important decision.
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