Managed accounts are allowed as a qualified default investment alternative in retirement plans, but they face significant challenges preventing them from overtaking target-date funds as the QDIA of choice. A May white paper from Towers Watson suggests that even with their challenges, managed accounts are underutilized by retirement plan sponsors.
Of the three investment options allowed by the Department of Labor as a QDIA — balanced funds, TDFs and managed accounts — Towers Watson said that the vast majority of sponsors choose TDFs. According to Vanguard’s How America Saves 2015 report, 39% of Vanguard participants were invested in a single target-date fund, and 88% of sponsors offered them. Only 4% of participants used a managed account program, while 22% of sponsors offered them.
Balanced funds, which have a static allocation, tend to be overweight equities for older investors, and underweight for younger investors, according to the paper.
Managed accounts, although not commonly chosen as the default investment, “have gained traction as a supplemental advice tool that participants can access independently for guidance,” according to the paper.
The Government Accountability Office issued a report in June 2014 that examined managed accounts and their use in 401(k) plans, and stressed that managed accounts are investment services, not products.
“Managed accounts are generally considered to be an investment service — not one of the plan’s investment options — while target-date funds are considered to be investment options,” according to the GAO. “The role of the participant is to enroll in the managed account service, or be defaulted into it, generally relinquishing their ability to make investment decisions unless they disenroll from, or opt out of, the managed account.”
Among the benefits to participants of using a managed account, according to Towers Watson, is a focus on income-based metrics, rather than total balance, taking into account the participant’s retirement goals, minimum income, outside assets, Social Security and tax treatment of different assets.