INSIGHT: Issues and Considerations for Retirement Plan Sponsors Resulting From Increased Adoption and Usage of Managed Account Services

Introduction

As part of an effort to improve retirement income outcomes for plan participants, retirement plan sponsors and the companies responsible for administrative and investment management activities are placing an increased emphasis on individual participant managed account services. These services, which are now commonly available from all of the largest retirement plan service providers, are designed to provide customized retirement planning to individuals with the goal of improving investment returns and to provide retired participants with a consistent and secure stream of income during retirement.

For companies that are considering the addition of a managed account service, or that already have a managed account service available to plan participants, there are certain distinguishing factors for plan sponsors to consider with respect to these services, as further described below.

Product Description

One distinguishing factor is specific to the type of managed account service available to plan participants.

The most basic form of managed account services involves projecting the account balance of the participant at retirement, offering contribution rate and investment fund recommendations using funds available to the participant, and providing periodic progress reports and updated asset allocation recommendations. With this type of service, the participant is ultimately responsible for implementing the recommended asset allocation approach. Basic advisory services are often available to participants at minimum or no annual fees.

The more advanced form of managed account services includes discretionary management of the account of the individual participant. Under this approach the advisor is responsible for selecting and allocating the balance of the participant using the funds available under the plan. Participants may be provided access to a financial service representative who is able to provide additional consultative support, and certain of these services are structured to include assets other than what is held by the participant in the retirement plan. Discretionary account management services are subject to additional asset-based fees that are incurred by the participant selecting the service.

Multiple Providers Offer Managed Account Services

A second distinguishing factor with respect to the managed account services product is that Financial Engines is, by many factors, the largest provider of these services. Financial Engines has more than $160 billion in assets under management and 1,053,000 participants. In addition to offering the service under the Financial Engines name, the company provides sub-advisory services for products available from Vanguard, Voya, and Alight Solutions. Additional managed account service firms include GuidedChoice ($15 billion), Morningstar Retirement Manager ($60 billion), and Fidelity’s Portfolio Advisory at Work ($32 billion).

The Availability of Managed Account Services Is Expanding

According to PlanSponsor more than 145,000 plans offered managed account services to participants in 2018, an increase of nearly 45,000 plans from 2011 and more than 9,000 from 2015. The report further notes that nearly 3 million participants are using managed account services, an increase of more than 1.3 million from 2011.

The 2018 Callan Defined Contribution Trends Survey notes that 64.8 percent of surveyed plan sponsors offer online investment advice services, and 52.3 percent provide participants with managed account services, an increase from 35.7 percent in 2015. With respect to enrolling participants in these services, approximately 93 percent have adopted an “opt in” or voluntary approach whereby participants must elect to enroll in the program.

Although managed account services are available to participants in the majority of defined contribution plans, utilization rates have historically remained low. Survey data from Cerulli Associates indicates that managed accounts represent approximately 4 percent of total plan assets. Research published by Vanguard indicates that managed account users represent just 3 percent of Vanguard participants. Barriers to adoption include limited participant understanding of the service, costs, and plan sponsors electing not to use managed accounts as the Qualified Default Investment Alternative or QDIA.

Adoption Rates Are Expected to Increase

While managed account adoption rates are low, they are expected to increase as retirement plan service providers develop strategies to improve participant retirement income outcomes. One of these strategies includes automatically transitioning “participants from target-date funds to managed accounts upon reaching a ‘triggering’ event such as turning a certain age.” Additional strategies involve using managed accounts as the default investment election or QDIA, and increasing communications efforts to increase employee awareness.

In addition to improving retirement income outcomes, managed account services also offer an additional source of revenue for retirement plan service providers, with certain providers (and a third distinguishing product factor) offering financial incentives for acquiring assets under management.

The ADV Form Part 2A for Voya Retirement Advisors states the following regarding their Professional Management or PM program: “While there is no additional charge to you for compensation of our Advisor Representatives, they are eligible to receive compensation from VRA for exceeding certain levels of service, including adherence to our service standards and enrolling participants in the PM program.”

The financial incentives also extend to phone representatives, as noted by the following: “While there is no additional charge to you for compensation of our Advisor Representatives, they receive compensation from VRA as a result of your enrollment in the PM program over the phone. This creates a financial incentive for the Advisor Representatives to enroll participants in the PM program.”

Managed Account Fee Schedules May Vary

A fourth distinguishing factor with respect to managed account services is that fee schedules may vary, even with the same provider.

Publicly available participant fee disclosures for two plans administered by Voya indicate a different fee schedule for managed account services through Voya Retirement Advisors. The Motorola Solutions 401(k) Plan, for example, charges participants electing to use the service a fee of 0.35 percent on the first $100,000, 0.25 percent on the next $150,000, and 0.10 percent on balances in excess of $250,000. For an illustrative participant with a $200,000 account balance, the total annual cost for managed account services is $600.

For participants in the United Parcel Service (UPS) 401(k) Plan, the managed account fee is higher, amounting to 0.45 percent on the first $100,000, 0.35 percent on the next $150,000, and 0.20 percent on assets in excess of $250,000. In the UPS Plan, an illustrative participant (also with a balance of $200,000) that elects managed account services incurs an annual fee of $800, a fee that is 33 percent higher than the comparable Motorola Solutions plan participant.

The Aetna 401(k) Plan, also administered by Voya, has a managed account services fee schedule that also differs from Motorola Solutions and UPS.

Managed Account Services May Subsidize Other Services

Retirement plan service providers, and in particular firms such as Fidelity, Vanguard, T. Rowe Price, and Voya, place a value on having assets under management. Whether a plan sponsor elects to use a proprietary mutual fund, collective investment trust, or stable value fund offering, lower administrative fees may result if a plan sponsor selects one or more proprietary fund options.

In the same manner as proprietary assets under management, although subject to some modifications depending on whether managed account services are provided directly or through a sub-advisor, managed account services may also have an impact on administrative fees.

One example is specific to the Chevron Employee Savings Investment Plan, which recently transitioned from Vanguard to Fidelity.

According to publicly available information, Fidelity charges participants an annual fee of $26 “to cover the cost of certain plan administrative activities such as legal, accounting, recordkeeping and participant communications.”

Although administrative fee arrangements can and do vary for any number of reasons, one possible factor in the pricing of the Chevron servicing arrangement is the provision of managed account services. As noted on the Chevron Benefits site, Fidelity provides Chevron participants with “a managed account service called Fidelity Personalized Planning & Advice.” The fee for the service is charged at the rate of 0.30 percent for the first $100,000 of individual participant assets, 0.20 percent on the next $150,000, and 0.10 percent on balances in excess of $250,000. Given that the Chevron Plan has an average account balance of more than $544,000 as of Dec. 31, 2017, and total assets of nearly $20 billion Fidelity may, over an extended period of time, generate higher revenues from managed account services than from fixed administrative fees.

Conclusion

Managed account services within defined contribution plans are expected to continue to increase with respect to participant adoption rates and assets under management. In that regard, it is appropriate for plan sponsors to be aware of the factors that distinguish these services, including differences with respect to the type of service offering, the providers of these services (direct and sub-advised arrangements), the presence (or absence) of incentive compensation arrangements, fee schedule variances, and their possible effect on administrative fees.

Steven Gissiner is a principal for Orchard Hills Consulting. He has approximately 37 years of diversified retirement plan consulting and administrative services experience, including working with client companies and retirement plan service providers to ensure the effective management and administration of qualified retirement plan arrangements.