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Time to Get Personal

Time to Get Personal
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Customize your plan menu with managed accounts

It seems a never-ending conundrum for plan sponsors, advisors and the retirement community as a whole: With the decline of defined benefit (DB) plans and the rise of defined contribution (DC) plans — shifting the savings/income adequacy responsibility from employers to individuals — what can employers do to help plan participants save enough, allocate their assets properly, consider all of their financial planning efforts holistically, determine their retirement drawdown strategy and factor in longevity and market risk along the way?

From managing retirement assets to ensuring income adequacy, countless studies have confirmed that employees are woefully unprepared for the many facets of this heavy burden. More than 88 million investors are responsible for managing their own retirement assets, with the unfortunate fact that more than $100 billion is expected to be lost every year by those who do so.Compounding this is the sobering fact that Americans still underestimate their life expectancy: Only 37% of women, and 32% of men, think they will live to age 85.As such, many are not saving nearly enough for a retirement that may last 30 years. In fact, 45% of U.S. working-age households have saved exactly nothing — zero — in retirement accounts.3

The impact of professional advice on participant outcomes

It’s widely known that investment self-selection (defined as a participant creating their own asset allocation portfolio) corresponds with the worst retirement outcomes for the typical participant and requires the highest participant expertise, which they often don’t have.4 In turn, plan sponsors are providing ways to help participants face the challenge of saving enough for their future by adding tools such as investment advice, financial wellness programs, streamlined fund lineups and professionally managed accounts (including auto-default into target-date funds [TDFs], target-risk or traditional balanced funds and managed account advisory services).

It’s clear that professional help can make a difference, with more plan sponsors offering investment advice within their plans. A 2016 Callan plan sponsor survey showed 88% offered investment guidance/advisory services (up from 79% in 2014).5 Plans that offer “professional help” through the use of managed accounts, online advice and TDFs are seeing an impact, according to a joint study by Aon Hewitt and Financial Engines across a six-year period:6

  • Participants using employer-provided professional investment help had better returns on their retirement investments than those who didn’t use help.
  • On average, the median annual returns for participants in the study who got help were more than 3% (332 basis points, net of fees) higher than people who didn’t get help. 

According to a Towers Watson Insights report, of the three offerings the Department of Labor (DOL) has allowed to be used as a plan’s QDIA — TDFs, balanced funds and managed accounts — the vast majority of plan sponsors use TDFs as default options because they are simple, cost- effective and dynamic in that the asset allocation, mapped to a participant’s age, shifts over time and de-risks as retirement approaches. TDFs continue to be the portfolio management tool of choice, with 86% of plans using them as the default QDIA, up from 64% in 2009.7

However, an evolving trend on the higher end of the advice continuum — customization — has become a way to support improved participant outcomes, as the two most common QDIAs (balanced funds and TDFs) do not address complex financial planning and personalized strategies and may not meet the needs of every participant. The third option — a managed account service — may help bridge the gap for a certain demographic of participants by providing professionally managed portfolios based on a deeper set of data points beyond age or risk tolerance. Plan sponsors could consider adding a managed account service to the plan menu as a complement to TDFs (as QDIA default) for older participants with more complex financial situations and larger account balances, as part of the plan’s segmentation strategy. 


Portfolio customization and advice

Managed account service providers create customized portfolios for plan participants, usually based on the standalone funds already available in the plan’s investment menu, and savings data gleaned from a plan’s recordkeeper or direct input from participants. The definition of a managed account can vary by application and provider, and can include:

  • Specific investment portfolio recommendations
  • A savings rate recommendation
  • Ongoing professional portfolio management and rebalancing
  • An estimated retirement income for each participant

Providers offering these services most often act as a fiduciary investment manager under Section 3(38) or as an investment adviser under Section 3(21) of the Employee Retirement Income Security Act (ERISA), giving participants access to professional management services.

This level of customization and advice comes with a price. While some providers include the additional cost a participant pays (on top of the investment fees of the underlying funds) in the base recordkeeping fee, others charge 50 basis points or more of assets managed by the service.9 For plan sponsors sensitive to additional cost, a potential solution is to offer the managed account service as a complement to the QDIA auto-enrollment (or re-enrollment) TDF default, in consideration of the various plan demographics:

  • Younger participants who prefer not to pay an additional fee or who do not have complex financial plans could remain in the default TDF tied to their expected retirement age. As they age and their situation changes, they could consider the managed account service.
  • Older participants nearing retirement, with more complex financial plans and increased retirement assets, could “opt-out” of the default TDF, and “opt-in” to the more customized managed account service for an additional fee. Critical to this effort would be enhanced, targeted education efforts around the basics, such as potential benefits and fees of the managed account service.
  • Participants who prefer to manage their own retirement assets without customization or additional cost can “opt-out” of the TDF default and create (or “self-select”) their own retirement portfolio.

Plan sponsors who offer managed accounts are seeing positive outcomes. According to Morningstar, employees enrolled in managed account services can achieve better outcomes through increased contribution rates and more diversified portfolios. As a result, they are also likely to have significantly more income in retirement. In fact, their report, “The Impact of Expert Guidance on Participant Savings and Investment Behaviors,” suggests participants receiving advice as part of a managed account service could gain as much as 40% more income in retirement.10

Separately, analysis of returns from managed accounts shows participants who are using this option often have an advantage over those who do not use an asset allocation product, according to a 2014 study by a leading recordkeeper. In examining the account performance over a five- year period of more than 315,000 participants in almost 1,800 plans, the study found that managed account users enjoy an average annualized rate of return of nearly 2% over those who do not use an investment allocation product (9.77% vs. 7.85%, net of fees) from 2010-2015.11

What makes this possible? Providers use individual participant data points from recordkeeping and payroll information — or directly from participants — for a unique, holistic snapshot. Beyond just a participant’s age, adding 10 or more data points (such as salary, savings rate, account balance, gender [for longevity], other assets, residential state [for tax purposes], Social Security estimates, spousal income/assets), can help to create a customized retirement portfolio better aligned with the individual’s unique circumstances and needs.12 In addition, professional management helps to prevent the emotional buying and selling that can impact participants who choose to manage their own retirement portfolios.13 

Which participants might benefit most?

According to Cerulli’s Retirement Markets 2015 report, the participants who benefit most from opting-in to a managed account service tend to be middle-aged, nearing retirement, with an increasingly complex financial picture (having amassed outside assets or sources of income outside the workplace), who are looking for additional services and are willing to pay a fee for the additional service/value. Within that definition, there are approximately 19.5 million U.S. households, ages 45 to 69, representing $9.1 trillion in investable assets (ranging from $100,000 to $2 million).14

Younger participants who tend to have simpler financial plans and lower assets, may not see the value of an individualized service for an additional fee. However, if offered as an opt-in to the plan, any participant can choose the managed account service for additional advice, and customization, if valued.

Opportunities and challenges

Managed account services are helping DC plans evolve from accumulation to solving the retirement income concern. More plan sponsors are offering managed account services — either as the default QDIA or as an individualized service — for participants who prefer a “do-it- for-me” approach with holistic, one-on-one advice and portfolio customization.

While managed account service adoption is on the rise, the retirement industry is still awaiting greater clarity and uniformity among providers, based on a 2014 U.S. Government Accountability Office (GAO) report. While the GAO stated that “managed accounts can be useful services and may offer some advantages [...] They build diversified portfolios for participants, help them make investment decisions, select appropriate asset allocations and estimate the amount they need to contribute to achieve a secure retirement,” they also pointed out areas for providers to improve upon, specifically fee inconsistency (fees can range from $8-$100 on every $10,000 in a participant account), and the lack of performance and benchmarking data.15

Last, some plan sponsors hesitate to use managed accounts as QDIAs because they know that in order to get the full one-on-one benefit, plan participants must interact with the managed account by providing data about their unique situation — and that few may do so, especially in a default situation. If participants don’t provide their unique data, then they are essentially paying for a customized approach, while not fully benefiting from it. However, adding the service as an opt-in complement to the QDIA/TDF default offers those participants nearing retirement and/or those with complex portfolios the ability to choose a more tailored approach.

Three key considerations

Whether adding the managed account service as the QDIA default or as an additional service, it’s critical for plan sponsors to partner with their retirement plan advisors (and where necessary, the plan’s ERISA attorney) to document the due diligence process and decisions when comparing service, support and fees among providers. Here are three key considerations: 

1. Assess the plan's demographics

Review the plan’s demographics and determine a segmentation strategy. Would providing a managed account service offer value to a certain demographic?

  • Most Millennials (age 18-34) have relatively small assets and their goals are similar (better suited for lower-cost TDF QDIA default).
  • Gen-X (age 35-50) and Baby Boomers (age 51-69) usually have a range of goals, and assets tend to be more substantial (better suited for a more sophisticated, opt-in managed account service).

Does the plan have enough participant data/ information to customize? How does the recordkeeper/provider plan to incorporate outside assets?

Would customization be worth the additional cost (given the industry focus on fees) for participant demographics and, if so, at what level (QDIA default, or opt-in additional service)? 

2. Conduct and document provider due diligence

Choosing a provider for the managed account service requires the same level of fiduciary due diligence and documentation process that plan sponsors bring to finding vendors for other aspects of the plan. In “The Optimal Default for Defined Contribution Plans,” Morningstar lists five main items to review:18

  • Methodology: Assessing things like the goal- setting process, portfolio construction, portfolio assignment and the ongoing monitoring and due diligence of participant accounts.
  • Technology: Evaluating the security of file feeds and data transfers, the experience of parties working together, staffing and volume capacities.
  • User Experience: How well does the provider connect with the participant in terms of the user interface/Web design/ease of use, call center integration, consistency of the message and integration with the recordkeeper, and approach of marketing and participant outreach?
  • Fees: How transparent is the provider about who is being paid what?
  • Plan Sponsor Support: Are contractual resources offered to ensure fiduciary and operational support? 

3. Develop a targeted education and communications plan

Plan sponsors should partner with managed account providers to help ensure that a managed account’s unique advantages — access to personalized advice or the ability to incorporate assets outside the DC plan for a more holistic financial planning experience — are conveyed to participants across Web, email, mobile, collateral and enrollment meetings.

To motivate participants to opt-in to the service, plan sponsors and advisers need to:

  • Help them understand what they are paying for.
  • Provide a clear path to opt-out of the default and opt-in to the managed account.
  • Provide best practices to share personal information beyond recordkeeper data for enhanced portfolio customization. 


Offering a managed account service as part of the overall investment menu can help plan sponsors provide a more customized advice approach to help solve the retirement income crisis. At BNY Mellon, we encourage plan sponsors to work with their retirement plan advisor or consultant, and as needed, an ERISA attorney to determine whether adding a more personalized solution for plan participants, through a managed account service, is right for the plan.

This article is from the Planet DC Summer 2016 edition.

1Help in Defined Contribution Plans - 2006 Through 2012, Financial Engines and Aon Hewitt, May 2014. 2Retirement Confidence Survey, EBRI, 2015. 3National Institute on Retirement Savings Crisis Study, 2015. 4The Optimal Default for Defined Contribution Plans, Morningstar, June 2015. 52016 Defined Contribution Trends Survey, Callan Associates, January 2016. 6Help in Defined Contribution Plans - 2006 through 2012, Financial Engines and Aon Hewitt, May 2014. 7Are Managed Accounts a Better QDIA? Towers Watson Insights, Spring, 2014. 8The Optimal Default for Defined Contribution Plans, Morningstar, June 2015. 9The Optimal Default for Defined Contribution Plans, Morningstar, June 2015. 10“The Impact of Expert Guidance on Participant Savings and Investment Behaviors,” David Blanchett, Morningstar Investment Management Group, 2014. 11“The Haves and the Have-Nots: What Is the Potential Value of Managed Accounts,” Empower Retirement, 2015. 12“The Next Evolution of 401(k) Plans,” Plansponsor, December 2015. 13“The Haves and the Have-Nots: What Is the Potential Value of Managed Accounts,” Empower Retirement, 2015. 14Retirement Markets 2015: Growth Opportunities in Maturing Markets, Cerulli 2015. 15United States. Government Accountability Office (2015). Clearer Regulations Could Help Plan Sponsors Choose Investments for Participants (GAO publication No.15-578), Washington, DC. 16Retirement Markets 2015: Growth Opportunities in Maturing Markets, Cerulli 2015. 17DC Investment Manager BrandscapeTM, a Cogent Reports Study by Market Strategies International, May 2015. 18The Optimal Default for Defined Contribution Plans, Morningstar, June 2015. 

BNY Mellon Retirement personnel act as licensed representatives of MBSC Securities Corporation (a registered broker-dealer) to offer securities, and act as officers of The Bank of New York Mellon (a New York chartered bank) to offer bank-maintained collective investment funds as well as to offer separate accounts managed by BNY Mellon Investment Management firms. This material is not intended as an offer to sell or a solicitation of an offer to buy any security, and it is not provided as a sales or advertising communication and does not constitute investment advice. MBSC Securities Corporation, a registered broker-dealer, FINRA member and wholly-owned subsidiary of The Bank of New York Mellon Corporation, has entered into agreements to offer securities in the U.S. on behalf of certain BNY Mellon Investment Management firms.

NY Mellon Investment Management is one of the world’s leading investment management organizations, and one of the top U.S. wealth managers, encompassing BNY Mellon’s affiliated investment management firms, wealth management service and global distribution companies. BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation.

Dreyfus Corporation and MSBC Securities Corporation are subsidiaries of The Bank of New York Mellon Corporation.

The material contained is for general information and reference purposes only and is not intended to provide or construed as legal, tax, accounting, investment, financial or other professional advice on any matter, and is not to be used as such.