401(k) record keepers making big bets on managed accounts

Fidelity and Empower announced first-of-their-kind services in recent months, hoping to capitalize on demand for greater personalization and generate new sources of revenue

Jun 1, 2017 @ 2:19 pm

By Greg Iacurci

Fidelity Investments and Empower Retirement are making big bets on 401(k) managed accounts, and competing defined-contribution-plan record keepers are poised to follow suit. What isn't yet clear is if these bets will pay off for retirement plans and their participants.

Fidelity and Empower, the No. 1 and No. 3 record keepers by assets, announced services in recent months that automatically transition participants from target-date funds to managed accounts upon reaching a "triggering" event such as turning a certain age.

Around a half dozen others are working on similar products, likely to be launched within a year, said Louis Harvey, president and CEO of DALBAR Inc., which reviews, audits and certifies retirement providers' managed accounts.

These firms are wagering that managed accounts will become increasingly competitive with target-date funds as the default investment option of choice for advisers and plan sponsors. Managed accounts are personalized, tailoring asset allocation for individual participants and providing fiduciary 401(k) advice, unlike TDFs, by far the most popular default investment, which only account for age.

"Advisers should, frankly, be celebrating," Mr. Harvey said. "If an adviser can bring to a plan a far superior solution, which I would say a managed account is compared to a target date, then they have added value. That's a reason to hire that adviser."

Some, however, are skeptical of the Fidelity and Empower approach.

On one front, there's cost, which is often greater than that of TDFs. Although it varies, some managed-account providers charge at least 0.50% on assets for the service, which is on top of fees for the underlying mutual funds.

As retirement-plan best practices shift away from using record keepers' proprietary TDFs, and record-keeping fees continue to drop, firms are seeking out additional sources of revenue, observers said. Managed accounts could be an answer.

"Trends regarding any sort of automatic default [into a managed account] based upon a certain age or retirement level are a revenue play, pure and simple," said Michael Montgomery, managing principal of Montgomery Retirement Plan Advisors, which advisers on more than $1 billion in DC assets.


"[Record keepers] seem to be starving for other sources of revenue. Managed accounts appear to be their savior," added Mr. Montgomery, who said he's doesn't dislike managed accounts, but questions if they can always add more value for participants over a TDF.

Fees for DC record-keeping services have dropped precipitously over the past decade. Per-participant fees were $57 as of last year, down from $118 in 2006, according to NEPC, an investment consulting firm.

At the same time, plans have quickly moved away from the proprietary TDFs many record keepers offer through their affiliated asset-management divisions. Roughly 32% of DC plans used their record keeper's proprietary TDF in 2015, down from 70% in 2011, according to Callan Associates, a consultancy.

Some consider managed accounts as the future of 401(k) default investing, and see record keepers' push into the market as further support of this notion.


"Both Fidelity and Empower have made a huge bet on them, which means they are going to be out there and a competitive factor," Mr. Harvey said.

The new Empower and Fidelity services in question, respectively called Dynamic QDIA and Smart QDIA, separate participants into two camps: those automatically defaulted into a TDF, and those defaulted into a managed account.

Those defaulted into a TDF, which doesn't have to be proprietary to the record keeper, are automatically shifted into a managed account when reaching a particular milestone, such as turning age 50 or attaining a certain 401(k) account balance.

The prevailing thinking is this: Participants with more complex financial situations, such as pre-retirees, are better served by more personalized advice.

Fidelity's service automatically shifts participants into its proprietary managed account, Portfolio Advisory Service at Work. Fidelity charges participants an average 0.6% in advisory fees for the PAS-W service. That's in addition to the cost of underlying funds, which are those a plan selects for its core investment lineup.

A few record keepers, such as Transamerica Retirement Solutions and The Standard, also have proprietary managed account products, which may be powered by third-party providers. More often, record keepers offer managed account services via firms such as Financial Engines, Morningstar and Envestnet.

Empower gives plans the option of defaulting into the former two. Advised Assets Group, the registered investment adviser of Great-West Investments, a sister company of Empower, provides fiduciary advice and financial planning to participants, while third parties serve as the sub-adviser executing on participant asset allocation, said Brian Cosmano, vice president of strategic product initiatives at Great-West Investments.

He declined to discuss fees for the managed account or the split among the Great-West RIA and third parties.

"We talk to people about fees frequently and openly," said Sangeeta Moorjani, head of Fidelity's Workplace Investing product, marketing and advice. "People who don't believe in the fees shouldn't be in this offering."


Some observers question if the managed accounts will be populated with enough relevant participant data, such as the quantity of assets held outside the 401(k) plan, to justify the additional cost of the default.

"The challenge has always been the participant not giving the answers," Craig Stanley, the director of retirement plan consulting at Summit Group of Virginia, said of managed-account inputs. "If they don't, I think it's fair to say the managed account becomes a glorified target-date fund."

Empower and Fidelity executives agree managed accounts are most effective when participants provide more information beyond what can be automatically populated, and have designed communication and outreach initiatives to counter inertia.

Empower, for example, sends a few notices to participants within 90 days of their transition, as well as a welcome kit after enrollment and a 60-day period within which participants can leave the service fee of charge, Mr. Cosmano said. Plan sponsors can also opt to have Empower call each participant up to three times to answer questions during the transition period.

If record keepers are able to effectively battle participant inertia and drive more engagement, "it could end up being a viable solution," Mr. Stanley said.


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