Target date and target risk get all the glory, but don’t ignore managed accounts in 401(k) plans, according to a new paper from Manning & Napier.
The firm points to a general “lack of familiarly” with [managed account services] compared to the other types of multi-asset class products mentioned, especially in QDIAs.
For the purposes of the paper, Manning & Napier defines managed accounts as a service where an investment professional creates an asset allocation for an individual investor based on factors such as age, retirement date, contribution rates, spending needs, and risk tolerance.
“Unlike target date and risk-based funds, managed accounts are generally comprised of investments that are offered on the single asset class tier of a retirement plan’s menu,” it adds.
When considering managed accounts for the 401(k) investment menu, take note of the following:
- The adoption of managed accounts as a QDIA has been limited; however, there has been an up-tick in the percentage of plans utilizing them as an opt-in service.
- Deterrents for selecting a managed account service as a QDIA include: perceived higher fee levels, a lack of a clear benchmark, lack of employee engagement, and the demographics of those using the QDIA (i.e., younger participants).
- As an opt-in service, managed accounts can be viewed as an enhanced offering for those participants with more complex financial situations.
- Plan sponsors should have a clear understanding of the managed account provider’s construction methodology, level of experience, and most importantly, their asset allocation philosophy.
- If portfolios built for the “average” participant are insufficient, why would a portfolio built for an “average” market be sufficient?
- Customization should not come at the expense of flexibility. Unless providers have the ability to adapt to changing market conditions, gains made through customization may be limited.