PLANADVISER - July/August 2017 - 46

investment-oriented
The issue boils down to a cost/benefit analysis, Glasgow
says. " The hurdle there is that, if participants don't engage
with the managed account, for a plan sponsor to make it
the plan's QDIA is just taking on additional expenses in
this litigious environment, " he says. " For those participants
who will provide that information, I think it can be a great
option. But if you're talking about the percentage of participants
who will answer all the questions to customize a
managed account allocation, you're usually talking about a
small group-maybe 10% to 15%. "
Recent technological advances do allow managed
account providers to get increasingly more data about individual
participants, even if they stay uninvolved, says Jason
Shapiro, senior investment consultant at Willis Towers
Watson in New York City. " Ten years ago, the only piece
of information that a managed account provider got was
usually a participant's balance, and maybe the participant's
age and salary, " he says. " Today, managed account providers
can often get data such as a participant's contribution rate,
whether [the person] has pension plan benefits or any other
retirement plans in the current workplace, and sometimes
data on a spouse's retirement plan accounts. " The growing
availability of data about defaulted participants who fail to
provide additional information themselves " helps respond
to the argument that if participants don't engage, all you as
a sponsor are providing them [with a managed account] as a
QDIA is a more expensive target-date fund, " he says.
Advisers can help sponsors look at several kinds of data
to judge whether their participants engage enough to make
managed accounts worthwhile, Connell says. Examine
email-response data from the plan's recordkeeper to see
what participants' " open " rates and " action " rates are for
educational emails, for example. Also, review attendance
numbers and patterns for group meetings held to discuss
the retirement plan, he suggests.
Connell notes that an adviser also can help put together
a brief employee survey, using a tool such as SurveyMonkey,
to gauge participant interest in managed account
features. He mentions a couple of possible questions:
Is
the participant interested in a more hands-on professional
management of his 401(k) account, including a customized
investment allocation and recommendation concerning
the appropriate savings rate? Would the participant feel
comfortable providing more-detailed information about his
life to the managed account provider?
" Keep it pretty simple: just a few questions, and yes or
no answers, " he recommends. " Then, if participants don't
respond to that survey, do you really think they are going to
fill out a managed account provider's questionnaire? "
Considering the Fees
Some of Avondale Partners' larger-plan clients are considering
switching to managed accounts as the default, Glasgow
says. " But the issue is that managed accounts do come with
pretty high fees. They can carry a price tag that is 50 or more
basis points [bps] higher than target-date funds-maybe less,
depending on the size of the plan, " he says.
It costs more money to provide more customized investments
and services, of course. Another factor: The market
for such services in 401(k) plans remains concentrated
among a few companies, Shapiro says. " Less competition
is one of the reasons why the fees remain at the levels they
do. Most of the market is being serviced by the three main
providers, " he says, meaning Fidelity Investments, Financial
Engines Inc. and Morningstar Inc. " If you look at the major
recordkeeping platforms, one of those three providers often
is the sole choice for managed accounts. "
Complicating the issue of sponsors justifying managed
accounts' higher fees, they and their advisers face more
difficulty benchmarking the investments' performance,
Sanderson says. Customization means managed accounts
have more varied allocation models for a plan's participants
than do target-date funds. " If target-date fund families
have 10 or 11 investment vintages, managed accounts
might have 50, " he says. " It is just an overwhelming amount
of performance data to benchmark. And, in many cases,
you don't have peer groups: There's not as much publicly
available third-party data for managed accounts. "
Advisers working with sponsors that are evaluating this
default-investment change should help them document
the process carefully. " If sponsors are going to think about
managed accounts as a default, they need to have a clear
understanding of, 'Why do we want to go that way?' If they
are going to introduce a more expensive QDIA, they need
to have a rationale for it, " Glasgow says. " If I have one piece
of advice for sponsors that are going to do it, it is this: Be
explicit
doing it and document your analysis. "
Sources say managed accounts likely will not make
major headway as a default until fees decline. Shapiro sees
potential in hybrid default investments being rolled out
by providers including Fidelity and Empower Retirement.
These combine target-date funds and managed accounts.
" Younger new hires are defaulted into age-appropriate
target-date funds. And then, at some trigger point determined
by the sponsor [such as reaching age 50], they are
automatically switched over to a managed account, unless
they opt out, " he explains. The hybrid model could help
address sponsors' cost concerns, he says.
" It's exactly the idea, " he says. " Early on, participants pay
a target-date fund fee. Then, once they have the crossover to
a managed account, they pay a managed account fee. "
-Judy Ward
KEY TAKEAWAYS
* Unlike target-date funds, managed accounts take into
consideration factors such as a participant's risk tolerance,
account balance, compensation and deferral rate.
* While lower-cost target-date funds may be a good solution
for younger investors, managed accounts may serve older
ones better, as these people have more complex finances.
in the committee minutes about your reasons for
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