Thursday, June 21, 2018

Managed accounts offer participants promise of 

more personalized asset allocation


By James Veneruso, Guest Columnist

Photo: Pexels.com
Back in 1969, the Rolling Stones (inadvertently) summarized the state of decision-making facing plan sponsors regarding managed accounts. Due to limited product availability on recordkeeping platforms, plan sponsors may not be able to get what they want. But in looking at the choices they do have, they may be able to get plan participants “what they need.”

By taking into account factors such as outside assets, contribution levels, the existence of a defined benefit plan, and risk tolerance, managed accounts offer participants the promise of a more personalized asset allocation. According to Callan’s 2018 DC Trends Surveyjust over half of plan sponsors provide a managed account solution, and of those who do, nearly all offer it on an opt-in basis.

But there are often limited choices when it comes to selecting a managed account provider, with recordkeepers typically offering only one or two options. In many ways, the situation is reminiscent of the target date fund market a decade ago, when many recordkeepers allowed only their proprietary solutions.

And although prevalence is on the rise, plan sponsors and consultants must be aware that not all managed accounts are created equal. Before offering a solution, plan sponsors must understand that managed accounts differ markedly in their underlying methodology and interface. These differences, in turn, lead to allocations that could drastically vary. Ultimately, these differences will produce divergent participant outcomes. To be clear, there is no single “correct” methodology; each carries its own merits and deficiencies. But plan sponsors must understand the characteristics of their solution and document the process that led to offering it.

To demonstrate the differences in methodology and outcomes, Callan supplied three leading managed account providers with identical fund lineups and various sample participants. The table below illustrates the unique characteristics of these sample participants as well as the allocations generated by each of the providers. 

Double click immage to enlarge.

As shown, the various providers produced unique asset allocations that differed across aspects such as the use of passive strategies, the equity allocation, and fees. These allocations resulted in divergent projected outcomes (represented here by the one-year projected standard deviation). The results also demonstrate the ability of the providers to take into account participants’ self-perceived risk tolerance and unique goals (e.g., desire for a bequest).

In summary, plan sponsors and consultants should evaluate the underlying methodology and functionality of the managed accounts they are considering. Additionally, both should continue to press recordkeepers to offer a choice of providers and by extension underlying methodologies.

The views expressed do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of Callan or TEXPERS.

James Veneruso
About the Author
James Veneruso is a senior vice president and defined contribution consultant in Callan’s Fund Sponsor Consulting group based in the Summit, New Jersey, office. Veneruso joined Callan in 2007 and is responsible for providing analytical support to Callan’s defined contribution clients and consultants. He is responsible for research and analysis of target date strategies and assists plan sponsor clients with target date manager searches and suitability studies.




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