Qualified Default Investment Alternatives (QDIA) in defined contribution (DC) plans have evolved toward enhanced customization aimed at helping participants build more savings over time. This is due in part to technological advancements that have increased the amount and quality of participant data available to facilitate the enhanced level of customization. Managed Accounts may be the next step in the evolution bringing personalized, professional investment management to 401(k) participants.

Why Managed Accounts?

Managed accounts, unlike target date funds(TDFs) and balanced funds, are a professional investment and advice service that allow participants to provide personal information and receive a customized asset allocation and investment strategy for their 401(k) assets. The allocation is professionally managed and can change based on information provided by the participant. This service is highly personalized and distinguishes managed accounts from TDFs (even custom TDFs). As participants get older there are greater disparities from one participant to the next making this type of customization more important.

Three things in particular excite me about managed accounts…

  1. Investment Flexibility
    Managed account providers often leverage the plan’s investment menu to create a customized asset allocation for participants. An added benefit is that most managed account providers may also leverage additional asset classes outside of the core lineup. Such asset classes can include private real estate and long-duration bonds. Some of these strategies may be excluded from the core lineup due to Plan Sponsors’ fears that participants will not understand and misuse the strategy. In the hands of a professional investment manager, however, access to alternative asset classes may be the necessary diversifier that can add alpha to a portfolio or help minimize drawdowns.
  2. Retirement Income Considerations
    Many managed account providers take into account factors such as retirement goals, desired monthly income in retirement, outside assets, and estimated Social Security benefits. Some providers incorporate tax efficiency into their draw down strategies. Others assist participants in converting account balances into sustainable income amounts. Unlike TDFs and balanced funds, which tend to be viewed by participants as a retirement “savings” vehicle, the managed account framework broadens the participants’ perspective to include the potential for retirement income generation.
  3. Improved Technology
    A number of providers can now automatically aggregate outside assets, giving participants a dashboard of their financial information in one place. This has greatly improved the user experience.

A Steady March Forward

Plan sponsors recognize the need to select the appropriate QDIA for their plan. Once upon a time the customary decision was TDFs. But times have changed. Plan demographics are shifting. We have an even deeper understanding of behavioral finance. There is an inherent need to offer personalized solutions that deliver positive retirement outcomes. These elements and more conspire to rewrite the story. The managed account is in the midst of an evolution and I remain optimistic that in due time, it will be the vehicle that moves our industry forward.