Over the summer, I have been working on a handful of pieces related to pricing in the defined contribution recordkeeping marketplace. The fee for explicit services continues to contract, and we have been highlighting those revenue enhancement areas, where fiduciaries should be working to document their process and conclusions.
- Proprietary investment management
- Managed accounts
- IRA rollovers
- Cross-selling retail financial products
Today’s focus will be the Managed Account.
Earlier in the year, my colleague David Williams wrote a piece explaining managed accounts and how they should be monitored. Much like recordkeeping, managed accounts are largely a scale business where costs are fixed and revenue variable.
The software that manages participant allocation and executes trades has either been built by the recordkeeping provider or licensed from an external party. Revenue from managed account solutions, however, is variable and tied to assets. While some staff is required to service the managed account participants, those costs are largely integrated into the larger cost of maintaining a call center pool.
To get a good sense of the margins in managed account solutions, you can speak with the technology providers that license their solution to recordkeeping organizations. Frequently, the fee they asses is either fixed at the relationship level or variable based on utilization at less than 0.10%. The retirement plan service providers then take that solution and package it for participant use at fees ranging from 0.325% to 0.60%. The premium compensates them for any participant fiduciary risk they may encounter by running the managed account program as well as for any staff they retain to support participants using the service. As recently as 2014, the U.S. Government Accountability Office (GAO) expressed concerns with the fees being charged and whether the benefits of the service was sufficient to justify the cost.
Further complicating the issue is how managed accounts are marketed to sponsors. Frequently, the sponsor assumes no cost for adding managed accounts and those costs are paid exclusively by the participant. Those costs incurred by participants are costs that must be monitored by the fiduciary to ensure reasonableness.
With the continued growth of assets in target-date funds, managed accounts are receiving much attention as the “smarter” do-it-for-me solution where differences in risk, income, and accumulated wealth can be incorporated into the asset allocation of every participant.
According to the PSCA 2017 Annual Survey of Profit Sharing and 401(k) Plans, 39% of all plans offered a managed account solution, and in those cases, 76% of plans had the cost paid by the participant.
While Vanguard’s 2017 How America Saves survey states that currently only 4% of assets are invested in managed account solutions, we have seen a tremendous variance in the plans we have engaged with including a client where half of the participants had managed account exposure.
Managed accounts may provide a valuable tool for participants with very specific investment objectives and circumstances, but when deciding to extend those services, the fiduciary should be mindful of managing quality and minimizing conflicts.
In addition to the qualitative aspects, asking questions about how utilization impacts the compensation of those interacting with your participants is prudent and necessary to understand where conflicts may potentially arise.
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.