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…
- 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.
- 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.
- 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.
Alpha: An investment’s return in excess of the return expected for the level of risk taken.
Mutual funds and exchange traded funds are subject to market risk and volatility. Shares may gain or lose value. Alternative asset classes may be volatile and are subject to liquidity risk. Investments in real estate companies, including REITs or similar structures, are subject to volatility and risk. Fixed income investing entails credit and interest rate risks. When interest rates rise, bond prices generally fall, and a fund’s share prices can fall.
Discussion of customized asset allocations is not intended to represent investment advice that is appropriate for all investors.
Discussion of balanced funds, target-risk funds, target-date funds or managed account retirement savings plan strategies in this presentation is not intended to represent investment advice that is appropriate for all investors.
Each investor’s portfolio must be constructed based on the individual’s financial resources, investment goals, risk tolerance, investing time frame, tax situation and other relevant factors.
Asset allocation cannot eliminate the risk of fluctuating prices and uncertain returns and does not assure a profit or protect against loss.
OppenheimerFunds does not recommend any specific asset allocations. A financial advisor can suggest an asset allocation strategy designed to meet your financial goals, time horizon and risk tolerance.
These views represent the opinions of OppenheimerFunds’ National Sales Director, DCIO, and are not intended as investment advice or to predict or depict the performance of any investment. These views are as of the publication date, and are subject to change based on subsequent developments.