Times have changed. With roughly 10,000 Baby Boomers turning 65 every day for the next 12 years (Pew Research, 2010) the focus is on customized solutions designed to provide positive retirement outcomes. I believe that managed accounts can help our industry advance in this direction.
When I speak of managed accounts, I am referring to the professional investment management and advice component offered through 401(k) plans. Managed accounts are one of three eligible QDIAs under the 2006 PPA; the other two are target date funds (TDFs) and balanced funds.
While TDFs are the dominant QDIA, the mighty TDF has severe limitations. A widespread criticism is that TDFs are designed based on an assumed “average” participant and the only factor taken into account is age. Individual factors such as access to a defined benefit plan, ownership of IRAs, personal savings and estimated Social Security benefits are not considered. Enter managed accounts.
Why Managed Accounts?
Managed accounts, unlike 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).
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.
Shackled By Fees
Why haven’t managed accounts gained more traction with plan sponsors and participants? Fees. In 2014 the Government Accountability Office (GAO) released a paper called Improvements Can Be Made to Better Protect Participants in Managed Accounts, which encourages plan sponsors to consider fees in relation to the advantages offered by managed accounts. However, more recently, a Morningstar study showed that a 25-year-old participant could have 40% more in retirement income after using a managed account service with an annual fee of 0.40% (How Can You Help Your Employees Retire, Morningstar, 2015). When implemented correctly, managed accounts may help improve retirement outcomes.
It is a myth that the advantages of managed accounts depend solely upon how engaged participants are with the service. While more engagement does result in more customization, many relevant data points exist within recordkeeping platforms that can significantly increase personalization without participant input. Such data include age, gender, salary, deferral rates, account balance, and employer match. This alone allows for a level of customization not found with a TDF. TDFs capture only one factor—age.
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.
OppenheimerFunds is not undertaking to provide impartial investment advice or to provide advice in a fiduciary capacity.
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.
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.