Managed accounts have hit a wall in DC plans, finds survey

A new report from NEPC offers new insights in the workplace retirement savings space, particularly when it comes to the use of managed accounts and target-date solutions.

For its 19th annual "Defined Contribution Plan Trends and Fee Survey", NEPC, a private wealth advisor and OCIO provider representing $1.7 trillion in total assets, drew insights from 137 clients. All in all, they had 278 DC plans overseeing $408 billion in assets and 3.2 million plan participants.

While there's been a notable increase in the availability of managed accounts over the past two decades, NEPC said adoption has plateaued and even slightly declined in the recent three to five years.

Across the plans NEPC surveyed, nearly half (46 percent) offer managed accounts, yet only 9 percent of participants utilize these options. This discrepancy underscores a potential misalignment in the benefits between providers and participants.

"We believe managed account providers can and do construct efficient investment portfolios, but plan providers, as fiduciaries, should push for improved outcomes for their plan participants through negotiating lower fees and seeking to better align the interests of the managed account providers with those of participants," Mikaylee O'Connor, principal and head of defined contribution solutions at NEPC, said in a statement revealing the results.

According to a May report from Cerulli last year, which was commissioned by Edelman Financial Engines, 401(k) plan participants in DC managed account programs were substantially more confident in their retirement strategies – 47 percent, compared to just 16 percent of their counterparts who weren't using advisory services.

To improve uptake among plan members, she suggested sponsors could offer a subscription-based model with lower base fees for less engaged participants, while providing more investment options for those more actively involved through tiered subscriptions.

"This approach allows for flexibility in costs and features, catering to diverse participant needs and engagement levels,” she said.

NEPC's survey also pointed to a sustained trend towards passive investments, especially within target-date funds. According to a 2024 report by Sway Research, TDF assets surged to reach $3.5 trillion in AUM by the end of the previous year, including $1.76 trillion in mutual funds.

TDFs emerged as the preferred retirement vehicle for a majority of younger participants under 35 years old, with 86 percent of that cohort being fully invested in those funds. That's compared to 76 percent of those between 35 and 44 years old, 70 percent of 45- to 65-year-olds, and 58 percent of those over 65.

In 2024, 54 percent of the plans NEPC surveyed say they offer passive TDFs, a sharp increase from 2020 when only 22 percent featured these passive options. Meanwhile, the share of respondents offering active TDF offerings has declined to 35 percent, a near-halving from 67 percent five years ago.

Looking at investment fees, the survey pointed to a trend of lower costs associated with larger plans. On average, base fees – including recordkeeping, trust, and custody fees – worked out to between $20 and $40 per participant for plans with more than 30,000 members. Meanwhile, plans with 1,000 to 5,000 members had fees that were between $40 and $70 per participant.

"Analyzing this year’s survey results through a long-term lens, we are excited by the ample opportunity for industry innovation, personalization, and increased accessibility in the defined contribution marketplace, especially across areas like alternative investments, managed accounts, TDFs, and retirement income solutions," O'Connor said.