The managed account category within the defined contribution space grew dramatically between 2012 and 2017, with total assets increasing from $108 billion to $271.3 billion, according to a new report from Cerulli Associates.

DC managed account assets expanded at a five-year compound annual growth rate of 20%, while the overall DC market experienced a CAGR of nearly 9% for the same period.

“Cerulli anticipates DC managed accounts will continue to exhibit organic growth, while the corporate DC market will largely rely on capital market returns to fuel asset expansion,” Jessica Sclafani, a director at Cerulli, said in a statement. “With the broader DC market facing negative net flows, this makes the managed account category attractive.”

In 2017, DC managed account assets represented 3.6% of the total $7.6 trillion DC market.

The Cerulli report looks at how managed accounts are positioned relative to broad DC market trends.

“Managed accounts are in line with many of the most pervasive and influential trends shaping the DC market — particularly financial wellness,” Sclafani said. “The increasing interest among 401(k) plan sponsors in encouraging and promoting financial wellness aligns with the more individualized and holistic mandate of a managed account.”

According to Cerulli, plan sponsors have become more and more aware of how employee financial wellness can affect their company’s bottom line, and are offering their workers access to advice.

In addition, the DC market is evolving from its sole focus on accumulation and has begun also to consider decumulation. Cerulli noted that managed accounts could be positioned as an in-plan retirement income solution, which in turn could prompt further 401(k) plan adoption and increase penetration with existing clients.

It said managed accounts may be better equipped to address retirement income issues because they are customized for individual participants and can consider outside assets.

Sclafani noted that Cerulli believes managed accounts may proliferate in DC plans as the move toward participant customization continues, but it will happen primarily outside the qualified default investment alternative space.

“Cerulli sees specific opportunity for managed accounts to increase their penetration with existing DC plan clients, through targeted campaigns to specific cohorts of participants, with emphasis on their position as a holistic solution with access to advice,” she said.

According to the report, the DC market is keenly focused on reducing fees for administration and investment management, especially in the QDIA space. According to Cerulli, managed accounts are nearly always contrasted with target date funds — “whether this is appropriate or not” — and so are considered expensive.

Cerulli also looked at whether defined contribution investment-only asset managers see the health savings account market as an opportunity to grow their assets under management. Some 30% of them characterize the HSA market as a medium or high opportunity.

Three in four of these managers look favorably on increased plan sponsor adoption of HSAs, inclusion of HSAs as a component of financial wellness programs and modernization of HSA investment menus. However, Cerulli observed that even asset managers bullish on these products generally still do not have a well-defined distribution strategy or an HSA expert on staff.

The Cerulli report found that at the end of 2017, stable value assets in 401(k) plans totaled $435 billion, less than 8% of the total 401(k) market, with managed accounts holding most of these assets.

In addition, nearly half of the $339 billion in 457 plans, which are typically offered to governmental employees, are invested in individually managed accounts. Cerulli projected that 457 plan asset growth would exceed that of 401(k) plans — “this dynamic makes 457 plans attractive as a stable value distribution target.”

Looking ahead, Cerulli said stable value could be positioned as a key component of a holistic retirement income solution or retirement income menu/tier.

The Cerulli report said that given its size and anticipated flows, the target-date fund category was worth pursuing, despite sundry challenges. Last year, these funds’ assets totaled $1.7 trillion.

What are the challenges? The most commonly identified one was growing interest in passive strategies. Fifty-nine percent of target date mutual funds assets are held in active funds, though in the five years to 2017, passive funds gained 12% market share from active ones.

Another challenge is the dominance of the biggest target date managers. Vanguard, Fidelity and T. Rowe Price collectively control 62% of total target date assets, upward of $1 trillion, according to Cerulli.

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