PLANADVISER - July/August 2019 - 42

recordkeepers, " Voris says. " If an adviser can use a managed
account program with multiple recordkeepers, that's really
attractive. Morningstar has solved for this issue. "
The usability with multiple recordkeepers is key to the
new Morningstar offering. " The technology, methodology,
user experience and the service model will be consistent
across all recordkeepers, " says Daniel Bruns, Morningstar
vice president of product strategy in Chicago. As of early
July, he says, Morningstar had a verbal commitment from
two more recordkeepers to incorporate the offering into
their platforms, and he expected at least one to go live with
it by year-end.
Bruns gives a quick walk-through of how the investment
portfolio construction happens: " Once we get the data
from the recordkeeper, Morningstar's analysis determines
the target equity percentage in each participant's portfolio.
Then we match that equity target to a fund-specific portfolio
that the advisory firm's home office has built. The advisory
firm takes on a 3(38) fiduciary role for the portfolio
construction. "
As for the participant touch points, an advisory
firm can co-brand the Morningstar online
managed account interface for the client, so
participants will see a familiar name. Morningstar
also trains call-center staffers at the
firm or at its own recordkeeper partners on
how to answer questions about the offering.
" Advisers are typically leveraging the recordkeeper's
call center to answer questions by
phone, " Bruns says. " Some advisory firms also
are planning to have their advisers sit down with
participants to talk about the managed accounts. "
The process for Empower's new AMA offering begins with
the recordkeeper gathering both its own participant data and
employee data from an employer client's payroll provider. It
has outsourced the initial risk assessment to Morningstar.
" We send all that data to Morningstar, which determines the
target-equity/fixed-income allocation for each participant, "
Cosmano explains. " Then the adviser decides in which asset
classes and funds participants should be allocated.
" At the end of the day, this is the adviser's program: He
is acting as a 3(38) fiduciary to individual participants, "
Cosmano continues. " He's in charge of building the portfolios. "
But beyond that, Empower handles many operational
aspects of the managed accounts. It provides the financial
planning tools and participant website, which, too, may be
co-branded with the adviser's firm name. The recordkeeper
also has a call center focused only on helping participants
with managed accounts. " Where the adviser comes in here
is in the workplace presence, helping participants, " he notes.
Three Potential Challenges
Offering managed accounts does potentially create challenges
for plan advisers. A few are as follows:
* Unknown growth potential. " The first challenge is that,
while managed accounts are growing in popularity, at this
point they are only 4% to 5% of assets in the DC [defined
contribution] market, " Cosmano says. " Adoption is the No. 1
issue. " Yet, he sees promise in the current approximately 35%
annual growth in managed account assets among Empower
plan clients.
SageView anticipates three main avenues for the growth
of its managed account service, Upham says. Some participants
may decide after having a one-on-one conversation
with a SageView adviser that this service meets their needs,
while self-learners may proactively seek out the service once
their plan starts offering the option. Finally, he says, some
plan sponsors are thinking about using the " dynamic QDIA
[qualified default investment alternative] " approach, which
automatically switches participants from a target-date fund
default into a managed account at a point predetermined by
the sponsor, such as a certain age or account balance reached.
* Sponsors' fee concerns. Offering a managed account
service involves more work, so it typically carries a higher
fee than some other
investments.
" Some sponsors say,
'We're paying X basis points for target-date index funds,
and there's no doubt that managed accounts have a
higher fee,' " Cosmano says. " But this is more than
an investment strategy: It's an entire investment
solution. There's a large education
about the value of managed accounts that
needs to take place and hasn't. "
Asked for advice on how advisers can
broach this topic with sponsors, Bruns
suggests first looking at plan participants'
current investment allocations and how
optimal, or suboptimal, they are. For example,
the Morningstar plan analysis tool can suggest
how a plan's participant base could be allocated in
managed accounts as a default investment. " That allows
a plan sponsor to compare its current target-date fund allocations
with managed accounts and quickly see if it makes
sense to think about making a change, " he says.
Bruns also recommends talking with the sponsor about
its comfort level with current plan success metrics, such as
deferral rates and projected income-replacement rates. " Are
participants saving enough now? And what support might
they need as they get near retirement? " he says. " Philosophically
speaking, how important does the employer think it is
to facilitate them getting that help? "
* Conflict-of-interest optics. Some sponsors may be wary
about hiring the same advisory firm to provide its managed
accounts that is already responsible to evaluate the plan's
investment menu. Asked how SageView will deal with a
sponsor's potential perception of a conflict, Upham says it
will utilize the same consultative and transparent communication
philosophy it uses for all work. " For sponsors interested
in managed accounts, we will have conversations
about what is available in the marketplace, including our
service and third-party services, " he says.
" Some sponsors will be comfortable with us doing the
managed accounts, but others may come down on the side
of, 'We are not sure we're comfortable with it, and we're
going to use a third party,' " Upham says. " We are fine with
that. Our main business is providing advice to plan sponsors,
and we don't want to alienate them. " -Judy Ward
42 | planadviser.com July-August 2019
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