Managed accounts are attracting only modest interest from defined contribution plan participants and executives.
Surveys show many DC plan consultants remain skeptical about managed accounts, relatively few participants use managed account services, and many plan executives prefer other qualified default investment alternatives, most notably target-date funds.
By the end of 2012, the top eight managed account firms had $107.9 billion in assets under management, less than 2% of the total $6.92 trillion in U.S. DC assets, according to Cerulli Associates, Boston.
“We see challenges” to managed account usage, said Kevin Chisholm, associate director at Cerulli. “Even if sponsors add it, will participants choose it?”
Consultants and managed account firm executives say participants most likely to use managed accounts are middle-aged or nearing retirement and with larger account balances, as well as those with sources of income outside the workplace.
“Their portfolios are getting complex,” said Sangeeta Moorjani, senior vice president of the professional services group of Fidelity Investments, Boston. “They have more sources of money, so they want more of an overall picture” of their financial health. Fidelity's managed accounts business had $5.6 billion in assets under management as of the first quarter of 2013.
Fidelity also offers target-date funds, but Ms. Moorjani said the two don't cannibalize each other's market share. “They coexist because one offers simplicity and the other offers personalization,” she said.
Most of Morningstar Inc.'s managed account clients also offer target-date funds. ”For sponsors, target-date funds are seen as a "safe' choice because they are very easy for participants to understand,” said James Smith, vice president for client solutions at Morningstar Investment Management, Chicago.
“Target-date funds don't address the bigger issues: Am I on track with my goal for retirement? And what is my goal?” Mr. Smith said. At the end of the first quarter, Morningstar's managed account business had $26.9 billion in assets under management, he said.
For Financial Engines Inc., “our sweet spot is (balances of) $50,000 to $300,000” with an average balance of $104,000, said Christopher Jones, chief investment officer of the Sunnyvale, Calif., firm that is the managed-account industry leader. “They can't get expert advice on the outside due to (the size of) their balances.”
Financial Engines' managed account business had $70.8 billion in assets under management as of March 31. It focuses on larger, more complex plans, such as those at companies with multiple matching policies, company stock, defined benefit plans and non-qualified plans, Mr. Jones said. Its average sponsor client has $1.23 billion in DC assets and 12,000 employees. And, 90% of clients also offer target-date funds.
Executives of managed account firms say the keys to greater growth are more plans offering them, the aging of the population, and a greater willingness by all participants to accept professional management for their retirement plan investments as well as outside income sources.
There are significant hurdles.
Among major DC consultants, 32% don't recommend managed accounts to their clients, according to an April survey by Pacific Investment Management Co. In the year-earlier survey, only 13% didn't recommend managed accounts.