“How does a qualified retirement plan benchmark a managed account?”

ERISA consultants at the Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings plans, including nonqualified plans. We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with a financial advisor from Kentucky is involved a case with managed accounts.

Highlights of Discussion

That’s a very important question for which there is very little formal guidance available to formulate a response. Keep in mind that a managed account is an investment service offering—not an investment option. Under the managed account model, investment managers use multiple factors or data points of an participant to determine the appropriate investment approach for meeting the retirement income goals of the individual. Because managed accounts have a higher degree of participant personalization than, for example, a target date fund, traditional benchmarking methodologies for a single fund, such as how the fund performed historically against a benchmark and/or peer, do not fit and, at best, are incomplete. But that does not mean a plan sponsor can ignore the issue.

The lack of accepted performance metrics for managed accounts is evident and cries out for attention.[1]  According to a 2021 Callan study, 71 percent of respondents that offered managed account services did not benchmark the outcomes of the services.[2] (Yikes!) Plan sponsors clearly need a governance process and guidance from savvy financial professionals in this area. While a comprehensive discussion of managed account performance measurement is beyond the scope of this Q&A, the considerations should at least include

• Did the managed account meet the goals the plan set for it?
• Was the managed account successful at producing the desired personalized participant retirement outcomes?

Conclusion

Offering managed account options in DC plans is a growing trend, primarily because of their enhanced ability to deliver personalized retirement outcomes. Whether to include managed account services within a DC plan is a fiduciary decision for plan sponsors and committees that should match the goals of the plan, and not be taken lightly. If a managed account service is suitable for a plan, the governance elements include selecting, monitoring, benchmarking and documenting all stages of the decision and maintenance process. The industry lacks an accepted framework to confidently meet these expectations. Financial advisors have a true opportunity to offer consultative value in this arena.

[1] NAPA-Net, “READER RADAR: Readers Reveal Mixed Messages on Managed Accounts,” August 2022

[2] Callan, “DC Plans Continue Laser-Focus on Fees, Exclusive Callan Survey Finds,” 2021