Managed accounts are coming up short, some say

Managed accounts have often failed to achieve their objectives in large defined contribution plans due to unfavorable comparisons to target-date funds, inadequate efforts by record keepers and poor cooperation among participants who don't provide enough information to make the offerings more effective.

That's the verdict of DC consultants, whose clients have $5.7 trillion in DC assets and who responded to the latest annual survey by Pacific Investment Management Co. LLC, Newport Beach, Calif. The survey of 26 consulting firms covering 2021 was published May 23. It was conducted in January and February, and each respondent had DC assets under advisement of $10 billion or more. Twenty-seven percent of consultants estimated that clients had median DC assets of $501 million or more; 50% estimated their clients had median DC assets of $101 million to $500 million.

When asked whether managed accounts produce more value "than other similar approaches such as target-date funds," a combined 42% said they disagreed or somewhat disagreed, while only 23% agreed somewhat. The rest were neutral.

When asked whether managed accounts are superior to target-date funds in generating income in retirement, 27% said they disagreed or disagreed somewhat vs. 15% who somewhat disagreed. Fifty-eight percent were neutral.

"There's clearly an indication there is a need for something in between managed accounts and target-date funds," said Rene Martel, Newport Beach-based managing director and head of retirement, in an interview.

Mr. Martel's prescription for "something in between" is a greater use of record-keeper data — rather than just rely on participants to provide detailed information — so that managed accounts can achieve their goals of providing customized retirement accounts. The data, he added, are available.

However, the PIMCO survey shows consultants believe record keepers don't have enough appropriate data.

Fifty-seven percent of respondents disagreed or disagreed somewhat with the statement that record keepers have "sufficient personal data to allow for personalized portfolios without the need for participant engagement," the survey said. Only 23% said they agreed somewhat, while 19% had no opinion.

Record keepers must pick up the slack because the survey shows minimal engagement from participants. Sixty-one percent of consultants said they disagreed or disagreed somewhat with the survey statement that participants "typically add and keep current personal data in managed accounts." Only 8% agreed somewhat, and 31% had no opinion.

"Participants have to be specifically engaged," Mr. Martel said. "Adoption has been limited."

Despite their criticisms, many consultants view managed accounts as an important retirement income strategy.

When asked what they would "most likely" recommend as a retirement income solution, 40% cited managed accounts, up 8 percentage points from the previous year's survey, placing third among 12 choices in the latest survey.

A target-date fund with a level payout (64%) ranked first, followed by a target-date fund with embedded guarantees (48%). Multiple responses were allowed.

Many institutional consultants also said plans that offer managed accounts can help encourage participants to keep their assets in employers' DC plans post-retirement.

When asked what strategies they recommend to clients for asset retention, 54% cited managed accounts — up 15 percentage points from the previous year's survey and sixth among the current list of 10 choices.

The top retention recommendations were allowing distribution flexibility, such as partial or installment payments (100%); adding retirement education and/or tools (96%); and communicating the value of staying in the plan (88%).

Many of those recommendations have been implemented. When asked what a majority of their clients have already done to retain plan assets, 75% cited education and/or tools; 61% reported distribution flexibility; 42% offered managed accounts; and another 42% communicated the value of staying in the plan.

These actions and recommendations illustrate a continuing trend among sponsors to actively or passively support participants keeping their money in plans rather than roll it over into an IRA or take a lump-sum distribution.

The consultants said 34% of clients actively sought to retain retirees' assets in their plans last year vs. 14% in 2014. They said 42% of clients preferred to retain the assets last year but didn't actively encourage retention. In 2014, the rate was 32%.

The survey also noted that only 6% of consultants' clients last year preferred to remove retirees' assets from their plans vs. 17% in 2014. The rest were indifferent.

PIMCO again found that it doesn't take much for an institutional consultant to recommend that a client offer a collective investment trust over a mutual fund. Assuming comparable performance, 42% said 1 basis point was enough to make a difference. In the previous year's survey, 36% said 1 basis point was enough to recommend choosing a CIT over a mutual fund.

Another 42% said 3 basis points or less was the tiebreaker for them recommending a CIT vs. a mutual fund. And 16% said 5 basis points was the cutoff between recommending a CIT over a mutual fund.

"Last year, I was surprised," Mr. Martel said about how much a difference 1 basis point can make. Given last year's results, "now, I'm not so surprised."

PIMCO, in a new question for this year's survey, also found that 65% of consultants would recommend a CIT as a qualified default investment alternative — assuming comparable performance — if the CIT was 1 basis point cheaper than a mutual fund. Twenty-two percent placed the tiebreaker at 3 basis points and 13% cited 5 basis points.

Among the survey's other findings, reviewing target-date funds will be clients' top priority this year among 19 choices, with 60% of responses. Evaluating retirement income solutions placed second with 56% and evaluating investment fees was third with 44%.

The desire to reduce fees was the main reason clients would change target-date fund providers, according to 65% of consultants. Other top reasons were performance relative to peers (50%), desire for a passive strategy (38%) and concern with glidepath allocations (35%).

Also, 75% of consultants said "in general, cyber risk is fairly well addressed by providers," while 13% said "we rarely exclude providers due to cybersecurity concerns." Eight percent said "in general, it's common to see providers who have not sufficiently addressed cyber risk" and 4% said "we regularly exclude providers due to cybersecurity concerns."

As for recommending ESG investment to clients, the consultants cited clarification/education on ESG terminology (71% of respondents), a more predictable regulatory framework on ESG within plans (63%) and ESG analytic tools (46%) as the most important factors for implementing ESG investments.

In addition, 39% of consultants said they recommend that clients offer one or more branded ESG investments while 43% said the plan's designated investment choices should employ ESG factors. Seventeen percent said they don't consider ESG when make investment recommendations.