There are subtle and not so subtle differences between Managed Account Services (MAS) and the popular Target Date Fund (TDF) that plan sponsors should be aware of. Mostly, it comes down to timing or age and specific profile of the participants. It is widely accepted that a participant in their 20’s with decades of savings potential will fare well and in many instances better using a TDF instead of a managed account service. So when should a plan sponsor consider managed accounts?
The adoption of managed accounts as a qualified default investment alternative (QDIA) pales in comparison to the utilization of TDFs for the QDIA, further distinguishing the suitability (or lack thereof) of a MAS for the masses, especially new, younger employees. So, why is this case?
The Problem with Managed Account Services
The real problem with managed account services has a lot to do with perception, but there are also some practical considerations that may give plan sponsors pause to introduce MAS to the investment line-up.
According to Advisory firm, Manning & Napier, “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).”
MAS are perceived as sophisticated instruments more appropriate for complex financial profiles.
Fees
MAS are generally associated with higher fees. According to a 2015 report by Cerulli Associates, the spread between managed accounts and target date funds can be upwards of 50 basis points. In many cases MAS fees are a bit mor complex and are often asset-based by participant account balance. Along with other common fees, MAS could cost up to 1% of assets in a participant account, thus lowering a participant’s return. The question of reasonability certainly may arise if a participant in their 20’s is paying 1% per year and returns fall short.
Performance
Many plan sponsors are not financial experts, and assuming a plan sponsor does become comfortable with the workings and strategy of the MAS investment option, there are potentially hundreds of possible investment variations. Tracking performance and benchmarking results may be out of the scope of some plan sponsors abilities and/or resources.
Participant Interest
Participating in a MAS requires a relatively high level of participant interaction and feedback. Consistent with the trend in simplifying investment choices and limiting technical involvement may simply be a systematic barrier to participant engagement.
If the participants are disengaged, they are less likely to provide this additional detail (e.g., outside assets), forcing the provider to rely solely on standard recordkeeper data (i.e., contribution rate, age, etc.). While this data is informative, the efficacy of the MAS is likely reduced.
Younger workers with low account balances are not appropriate candidates for MAS since their primary goal in the accumulation of wealth. Plan sponsors should carefully consider their end-users when deciding on introducing MAS, especially as a QDIA.
