401(k) managed account competition heats up as Fidelity expands reach

Fidelity, responding to demand for fiduciary services, will be competing with third-party providers such as Financial Engines and Morningstar for distribution

May 17, 2017 @ 2:17 pm

By Greg Iacurci

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Fidelity Investments, the largest provider of defined contribution plans, is moving to expand the reach of its fiduciary managed-account service for retirement plan participants by making it available to record-keeping platforms outside of its own.

As such, Fidelity appears to be the first among competitors with a proprietary managed-account service to expand beyond its proprietary record-keeping platform.

"I haven't seen any other record keeper expanding their product offering," said Brady Dall, an adviser at 401(k) Advisors Intermountain, which oversees more than $2 billion in DC assets. "I don't know that anybody else has the horsepower to be able to do that."

Fidelity has roughly $1.6 trillion in DC assets on its record-keeping platform, over $1 trillion more than its next-closest competitor, TIAA.

Several record keepers, such as Empower Retirement, offer fiduciary investment-advice services to participants through proprietary managed accounts.

Many, including Fidelity, also offer similar fiduciary services via third-party providers such as Financial Engines, Morningstar, blooom and Guided Choice. Fidelity will be competing directly with these third-party providers for distribution through other record keepers.

Sangeeta Moorjani, head of Fidelity's workplace managed accounts business, said the firm has a competitive service, and as such will be "facing off" with other providers.

"We are absolutely targeting the broad market," Ms. Moorjani said. "Record keepers can have more than one managed-account offering, and plan sponsors can choose the one they want to use."

However, some are skeptical there will be much traction, especially among competitors.

"I'd think competing record keepers wouldn't want anything to do with them," said Chris Brown, founder and principal of Sway Research, which studies asset management distribution in DC plans. "You'd think some would view it as letting the fox into the hen house."

Fidelity is making its managed account, Fidelity's Portfolio Advisory Service at Work, more broadly available by targeting record-keeping software providers. FIS Relius was the first to integrate with Fidelity, and three record keepers — Sentinel Benefits, Alliance Benefit Group of Michigan and Alliance Benefit Group-Rocky Mountain, which use Relius' software — are offering PAS-W.

Advisers using these record keepers with DC-plan clients can access Fidelity's managed account.

The Omni record-keeping system, also owned by FIS, is Fidelity's next target, Ms. Moorjani said. The Omni system supports several prominent record keepers such as Paychex Inc. and Prudential, she said.

Ms. Moorjani acknowledges that the Labor Department's fiduciary rule, which raises investment-advice standards in retirement accounts, as well as the market's broader recognition of fiduciary duty and the growth in financial wellness initiatives have increased the demand for fiduciary services.

(More: Fidelity's approach to DOL fiduciary rule rankles some 401(k) advisers.)

Managed accounts such as PAS-W offer participants a sort of customized target-date fund, in which the firm has discretion to alter a participant's asset allocation based on data points such as income, age and deferral rate.

TDFs have been overwhelmingly more popular in DC plans — only 7% of plans with a qualified default investment use choose managed accounts as the default, compared with 75% for TDFs.

But, record keepers stand to make more money through managed accounts than through TDFs, observers said. Fidelity, for example, charges participants an average 0.6% in advisory fees, which is in addition to underlying fund costs.

While Fidelity has a leg up in managed-account distribution over its platform, it will be much more difficult through other platforms, said Brooks Herman, head of data and research at BrightScope Inc.

"Winning business on other record-kept plans is another story," Mr. Herman said. "Then it's a distribution play."

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