Are Managed Accounts Right For Your 401(k) Plan

The shift to remote work has undeniably led to an increase in the use of managed accounts in defined contribution (DC) plans. Interactions between investment experts and participants that used to be in person have moved online, to webinar-based engagements, for example, likely hindering engagement levels in retirement plans in general. What was once accessible to participants—on-site meetings and one-on-one coaching sessions with recordkeeping partners, providers, financial advisers and financial wellness coaches—has moved online and challenged the remote workforce.

Swift personal changes in the era of COVID-19, including layoffs, furloughs and the financial insecurity that followed, also led to a higher demand for personalized coaching. Whereas target-date funds (TDFs) tailor a participant’s investments based on their age, managed accounts offer an adaptive, holistic view that takes a participant’s current life into account. The investment accounts consider a participant’s other retirement savings and income sources, beyond what’s in their DC account, to determine the ideal contribution amount.

Managed account engagement for the remote workforce isn’t new, however. In fact, remote workers have been attracted to the investment offering since before the pandemic started. A Morningstar study conducted pre-COVID-19 found that remote employees were 7.4% less likely to use the plan default investment option and 1.3% more likely to use managed accounts. As the percentage of remote workers increases in coming years (Morningstar predicts a growth from 13% of the workforce being remote in 2019 to 22% by 2025), managed account offerings are expected to rise as well.

The availability of managed accounts in DC plans has progressively risen since the passage of the Pension Protection Act (PPA) of 2006. With that legislation, they were named one of the three safe harbors within qualified default investment alternatives (QDIAs) (the other two being TDFs and balanced funds), but managed accounts were rarely used as the default investment option because of their high costs. As prices have decreased, more recordkeepers and advisory firms are using the option.

Even younger employees, who are generally defaulted into a TDF that bases their risk allocation on age, are taking an interest in managed accounts. Participants who grew up adapting to technology are likely to be comfortable with managed accounts.

As COVID-19 uproots the lives of many, participants are searching for options that no longer just take their age into account.