With the New Year comes an interest in New Year’s resolutions. For plan fiduciaries that offer a managed account solution, I would like to propose a New Year’s resolution: a better understanding of their managed account. In my experience, managed accounts are frequently overlooked by plan fiduciaries. In a previous blog post, my colleague Erik Daley discusses the financial incentive that recordkeepers have for pushing these products. They are frequently sold to plan fiduciaries as zero cost to the plan, with the only expenses being paid by participants who elect to use the products. While technically true, this approach overlooks the fiduciary responsibility to monitor all fees paid by plan assets and assumes that all participants are actively monitoring their plan fees. These products have been growing in interest and usage among defined contribution plans, and I believe that it is time that the fiduciary oversight catches up with the usage.
A thorough assessment of a managed account solution should involve a detailed investment due diligence process and my colleague, David Williams, discussed what that should look like in a previous blog post. For many plan fiduciaries that may seem too daunting an undertaking. For those sponsors, I might propose you work with an investment consultant that can provide that service. But I would also recommend a simpler approach to begin your analysis. The four numbers you should know can provide a great deal of insight into your managed account program and can easily be requested in a simple data request to your relationship manager.
What is the fee schedule for the managed account solution?
Most managed account solutions offer an asset-based fee schedule with tiers or breakpoints based on the amount of assets a participant has invested in the solution. Your managed account provider should be able to provide this information. In our experience, these fees are quoted frequently as if they are standard across all clients, but they can be negotiated by the plan fiduciary.
What is the percentage of plan assets invested in the managed account?
Requesting this information will give you a sense of how broadly utilized the solution is within your plan. Based on our discussions with managed account providers, for plans that require an opt-in, the adoption rates tend to be relatively modest, in many cases less than 10-15% of plan assets. In a few cases, we have seen significantly higher utilization rates. In these cases, the higher than normal utilization rate led us to examine the vendor’s incentive compensation structure and the plan’s communication materials to identify why the utilization rate was so high.
How many plan participants utilize the managed account solution?
Looking at the number of participants who utilize the managed account solution can also provide a sense of the level of utilization of the managed account solution. The primary benefit of these products is to provide a more custom solution for participants who have more complex investment scenarios. That complexity tends to correlate highly with the participants’ compensation and account balance. We generally expect to see managed accounts utilized by participants with higher average account balances and the lower cost qualified default investment alternative (QDIA) utilized by smaller balance participants. Understanding the number of participants who utilize the managed account, coupled with the amount of assets in the product, can inform you about the average investor in the solution. If the average account balance is low, it may lead to questions about why participants are utilizing the managed account instead of the lower cost QDIA solution.
What were the fees paid (in dollars) for the managed account service last year?
The fee schedule can provide some sense of the fee level paid by the plan, but in most cases, it is difficult to translate that to an understanding of the revenue impact to your recordkeeper. For most mid- or large-sized plans, recordkeeping fees are going to be either a fixed fee per participant or an asset-based fee that is significantly lower than the managed account fee, when expressed as a percentage of assets. The utilization rate questions can help contextualize fee schedule, but the simplest way to understand the impact is to compare dollars paid.
For example, a couple of years ago we were working with a client with approximately $76 million in plan assets across their three plans that utilized a managed account solution that was proprietary to their recordkeeper. We were helping the client conduct a vendor search process, and we identified the existing fees paid for recordkeeping services as approximately $122,000 annually. The incumbent provider was proposing a significant reduction in fees, and as we dug further into the engagement, we found out that they were making an additional $118,000 annually from the managed account solution. Requesting the actual fees paid showed the impact that the managed account solution had on the total cost of the plan and enabled us to negotiate a significant reduction in fees from the recordkeeper.
Conclusion
As we begin the New Year, make a commitment to learn a little bit more about your managed account. The four numbers discussed above should be easy to request from your recordkeeper and should give you a good baseline to begin your analysis. And if your recordkeeper cannot, or will not, provide this information, that can also help you in your assessment of the quality of service they provide.
Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Multnomah Group does not provide legal or tax advice. Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.