Personalization is all the rage, to the point where online retailers can anticipate what we want to buy next and streaming services know what we may want to watch. But individualization has yet to reach the defined contribution world, where everyone born within a five-year period have the same asset allocation through target date funds and everyone is auto-enrolled at the same contribution level.
So, are managed accounts the solution and are they worth the cost and effort?
Target date funds still have a long runway and continue to gather assets because they have become a popular default option as more DC plans use auto-enrollment. However, most experts believe that they are a way station on the road to more personalized investment options like managed accounts.
That said, managed accounts have some issues. Costs, even for multibillion-dollar DC plans, can be 25 basis points or more, although that is coming down. This compares to almost no additional fees for TDFs. Also, the data necessary to create a meaningful managed account is often not readily available, and requires engagement with participants. This is especially problematic for a default option or QDIA.
Cost, data and engagement aside, the real question may be whether managed accounts outperform TDFs. There is scarce data to show any significant difference in results between participants in a managed account and those in a TDF. Many experts believe that TDFs are good enough for younger investors whose primary goal is to save as much as possible, but less effective for people who are closer to retirement and need more flexibility in their investments—something that managed accounts can provide.
Many of the larger retirement plan advisor (RPA) firms have created advisor-managed accounts in cooperation with organizations like Morningstar, iJoin and Leafhouse that not only enable plans and participants to stay in the same program even if they switch record keepers, but can provide additional revenue to the advisor.
Managed account usage has been slow, although Vanguard recently reported that 41% of its plans offer them, with 10% of participants invested in 2022, compared to 33% of plans and 7% of participants in 2018. Vestwell, a fast-growing fintech record keeper, claims that 65% of its plans use its managed account offering and have achieved high participation, potentially the result of its access to richer data.
A possible interim step between TDFs, which use one datapoint (age), and managed accounts, which use up to 20, are personalized TDFs, which deploy five data points that are readily available from the record keeper and whose costs are typically lower than for managed accounts. Meanwhile, TDFs are still the most popular “personalized” option and default in DC plans.
In our view, the move toward managed accounts and greater personalization than TDFs seems inevitable, especially if retirement income is imbedded, but hurdles remain. A recent Cerulli report noted that only 7% of advisors are now recommending active TDFs, mainly because of cost, with 47% suggesting passive and an equal-percentage blend. So, while many experienced registered pension advisers are advocating for managed accounts, the timeline for adoption is uncertain.