Franklin Templeton’s managed account product could be future for DCIOs

Managed accounts offer DCIOs the opportunity to be a more active and important part of the DC ecosystem. It moves them from being dependent on record keepers, advisers and plan sponsors to create the strategy to help participants, to being an advice provider of customized investment solutions.

The recent announcement of Franklin Templeton’s Goals Optimization Engine, initially in partnership with Vestwell, may mark the next evolution for defined-contribution investment-only providers searching for a new role and identity in the DC world.

The role of mutual funds in the DC market has evolved. In the 1990s, they were dominant, and providers’ relationships with advisers helped get products into smaller and midsize plans. Now fund providers have to curry favor with the record keepers, advisers, broker-dealers and aggregators that control plan sales. Add the move to indexing and packaged products like target-date funds, many of which are propriety and emphasize asset allocation and not securities selection, and it’s no wonder that all but the top 10 DCIOs have been doing some serious soul-searching.

“We have to de-commoditize our business,” said Yaqub Ahmed, Franklin’s head of U.S. retirement and insurance. “We have to move from chasing returns to goal-based products.”

At the heart of Franklin’s service are algorithms that result in 16 different models that are “personalized, responsive and dynamic,” Ahmed said. The models can include Franklin Templeton and third-party funds, ETFs, smart beta and passive strategies, he said.

He emphasized the need for managed account fees to come down. The Franklin service’s pricing would be competitive with active target-date strategies, depending in part on the percentage of Franklin funds included, he said.

Managed accounts offer DCIOs the opportunity to be a more active and important part of the DC ecosystem. It moves them from being dependent on the record keepers, advisers and plan sponsors to create the strategy to help participants to be more successful, to being an advice provider of customized investment solutions. Franklin is willing to be a 3(38) fiduciary in some situations.

Investment managers tried to gain power in the 1990s and early part of the 2000s by being the record keeper or outsourcing the administration, with only a few like Fidelity, Vanguard, American Funds and T. Rowe Price surviving.

“Goals Optimization Engine is an alternative to private-label record keeping,” Ahmed said. “We are not wedded to one record keeper.” The company got out of the business in 2007, selling to Great West’s FASCore, which had been providing the service and has morphed into Empower Retirement.

Some retirement plan advisers may be concerned about the consolidation of record keepers resulting in fewer choices. But it is healthy in that the remaining providers have the resources to deliver a robust workplace financial and benefits solution to plan sponsors and participants.

“The workplace has become the financial epicenter for many DC participants, especially the underserved,” Ahmed said.

Additionally, managed accounts and other financial wellness services must be record-keeper agnostic to accommodate the inevitable provider changes that most plan sponsors experience every seven to eight years. With Goals Optimization Engine and other independent providers of managed accounts, RPA clients do not have to make a change when a record keeper shift occurs.

Fees also matter. Pricing from managed account providers like Financial Engines and Morningstar is anywhere from 35 basis points to 50 bps or higher, while target-date pricing has dropped dramatically. Alternatives from world-class asset managers that are willing to subsidize fees will democratize managed accounts, especially as they become the default option.

DCIOs will still need to partner with RPAs and record keepers, which is why Franklin is not wedded to the Vestwell platform. But if they cannot be participants in the war to improve retirement security, they can be important arms dealers.

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Fred Barstein is founder and CEO of The Retirement Advisor University and The Plan Sponsor University. He is also a contributing editor for InvestmentNews’ RPA Convergence newsletter.