Monitoring a Managed Account Program

As the reliance on defined contribution plans for retirement security continues to grow, participants are required to make complex decisions about the management of this important asset. Many participants feel ill-equipped to manage their accounts, and in response to that hesitancy, the retirement plan industry has developed tools to support participants through multiple product offerings. These include target date funds, lifestyle funds, balanced funds, participant investment advice, and managed accounts. The focus of this blog post is the development of managed account products and how plan sponsors can fulfill their fiduciary duties for monitoring the programs. 

Managed account programs were first developed for retirement plans in the early 2000’s. They are designed to provide a personalized investment strategy for participants based on multiple factors (e.g., age, risk tolerance, financial situation, etc.). The use of multiple factors contrasts with the most prevalent asset allocation strategy in defined contribution plans – target date funds. Target date fund selection relies largely on a participant’s anticipated retirement date. A Schwab study from 2016 found that 70% of participants would like to receive personalized investment advice for their 401(k) accounts. Managed accounts are viewed by many industry experts as offering this desired service.  Usage statistics are varied by plan and recordkeeper.  Vanguard’s 2017 How America Saves survey shows  new participants entering a plan in 2016 are largely investing (85%) in a single ‘professionally managed allocation’[1], but currently 4% of assets are invested in a managed account service. 

From a plan sponsor perspective, the decision to offer a managed account product is fiduciary in nature.  One key feature of a managed account provider is its ERISA fiduciary responsibility to participants. Similar to a plan’s investment options, the managed account provider needs to be monitored by the Committee. A Committee can accomplish this monitoring duty through their regular meetings. Below is a summary of the key elements of the managed account oversight process.

1. Understanding the product:
   1. Firm overview – organization structure and firm history
   2. Team – description of key team members, their roles, and responsibilities
   3. Participant interface and inputs – integration with recordkeeper website, input data (default and participant initiated), and contribution strategy
   4. Portfolio construction – program objective, research tenets, assets classes utilized, minimum required funds/asset classes, active/passive fund, and implications of outside assets, or other pension income streams
   5. Portfolio oversight – asset allocation, fund, and risk monitoring
   6. Operations – fund types, expenses, and fiduciary status
2. Reviewing enrolled participant data with the provider at regular intervals
3. Reviewing participant communication materials and the program’s outreach strategy
4. Reviewing program fees

The utilization of managed account programs is low despite defined contribution plan participants described need for personalized investment advice as cited in recent surveys. We expect managed account programs will continue to evolve to address participant needs of improved retirement income security and potentially garner higher utilization rates. As such, plan sponsors monitoring efforts will have to evolve with managed account programs changes.                              

Notes:

[1] Professionally managed allocation is defined by Vanguard as a participant being invested in a single target date fund, balanced fund, or managed account program.

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.