Byline: John Manganaro
Summary paragraph: Managed accounts and TDFs each have a distinct role to play
According to Cerulli, managed accounts have some hurdles to overcome to effectively replace target-date funds (TDFs) as the go-to choice for Employee Retirement Income Security Act (ERISA) retirement plans' qualified default investment alternative (QDIA) designation.
Still, target-date funds have some negatives that all ERISA fiduciaries should consider, Cerulli says. "The chief argument against target-date funds is their homogeneity, as they don't account for an investor's risk tolerance, specific retirement plans or other assets."
In this sense, the managed account approach "appears to be a worthy alternative to the target-date fund, as it can provide a level of customization the target-date fund cannot by taking into account factors such as an investor's income, age and access to a defined benefit [DB] plan," Cerulli says.
Matching the findings from the 2015 PLANSPONSOR Defined Contribution (DC) Survey, Cerulli found that plan sponsors are increasingly split on where they come down in this discussion-on the side of managed accounts or of TDFs as the preferred QDIA. While target-date funds are still dominant, plan sponsors have "increasingly recognized the value of the managed account, and adoption has increased at the plan level," Cerulli says. "As of year-end 2014, 22% of DC plans offered a managed account, a figure that has doubled since 2009."
Important to note, Cerulli's report goes on to explain, managed accounts are "available to better than half of plan participants, meaning adoption of these platforms is greatest in larger plans." Despite growing availability of the accounts, participant adoption remains limited-just 7% of participants used them as of year-end 2014, according to Cerulli.
"The added degree of customization in managed accounts has led some to argue they are a superior solution for DC participants, but, as [the strategy is] currently constructed, a number of obstacles exist. First, managed accounts come at a higher cost than packaged target-date funds," Cerulli notes. "Supporters will argue that costs are justified, thanks to greater customization, and could decrease with higher adoption. Second, managed accounts are viewed as a 'black box' with no practical way to benchmark them. The third objection is the use of the risk tolerance questionnaire."
Without greater transparency in the way the managed account factors a plan participant's attitudes, goals and risk tolerance, the added benefit of customization relative to a target-date fund is less clear, Cerulli says. -John Manganaro