The Department of Labor makes it clear that plan sponsors have three choices when it comes to a retirement plan's Qualified Default Investment Alternative (QDIA). The QDIA may be a "balanced" mutual fund investing in stocks and bonds, a target date or target risk mutual fund, or a managed account. There has been a fair amount of "silver bullet" press generated about managed accounts so I thought I would offer my two cents and notes of caution.
If I were to boil my argument down, it would be that managed accounts are being pitched as a more personalized solution in defined contribution plans, but committees must critically assess whether they deliver meaningful improvements — or just market appeal.
Managed accounts take into consideration many participant variables (ie, salary, contribution rate) rather than simply the person's age in order to craft a custom portfolio of investments. Compare this to target date mutual funds which route the participant to a fund based on when they will turn 65 ("retired"). I am 57-years-old as of this writing so my target date mutual fund would in theory be a 2035 vintage. But what if I want work earlier or longer than 65? The 2035 vintage might not serve my needs. And what happens if I have not saved enough or want to invest more aggressively than the 2035 fund allows? Again, target date funds are a "one-size fits all" based on a person's age. Managed accounts try to customize a portfolio with more participant variables. The theory is that more customization based on participant data could lead to better results but as we all know, past performance is not guarantee of future results.
What plan sponsors need to ask themselves in regards to managed accounts is "Is the managed account purported benefit real and measurable or just perceived?"
Here is one approach for plan sponsors considering adding managed accounts to their retirement plans.
Start with the Why
Define precisely which participant issues you hope to address — e.g. under-allocation to equities, low savings, behavioral inertia, poor diversification. Managed accounts should be assessed only after the committee clarifies those goals. Those issues can then be turned into metrics by which managed account programs can be evaluated.
Fiduciary Lens under ERISA
Decisions must be participant-centric and prudent. The plan fiduciary should require evidence that the managed account solution meaningfully improves outcomes (net of fees). There are variations among providers and questions whether dynamic rebalancing or personalization adds material value.
Monitoring & Metrics Are Essential
- Establish KPIs in advance: e.g. engagement rates, changes in contribution behavior, net returns after fees.
- Avoid adopting “just because it’s new”methodology/ shiny object syndrome. Ongoing oversight is critical.
Beware of Correlation vs. Causation
- Statistics cited by some providers (e.g., higher average contribution rates for managed account users) may reflect a self-selection bias (i.e. more engaged participants opt in).
- Fiduciaries must dig into whether the managed account drove the improvement — or whether those participants were already more engaged.
Prudent Decision Steps
- Define desired participant outcomes first
- Ask whether managed accounts reasonably address those outcomes
- Set clear metrics and monitor over time
- Analyze results with skepticism about causality
- Committees should not chase every new product — their responsibility is to adopt solutions demonstrably in participants’ best interests.
The Parting Glass
- Caution over enthusiasm — Managed accounts are not a “silver bullet.” Too many implementations focus on marketing or “bells and whistles” rather than demonstrable incremental value.
- Governance is the differentiator — The success of managed accounts hinges on disciplined selection, documented process, rigorous oversight, and pre-defined benchmarks. Poor governance is where litigation risk lies.
- Data is king — Without meaningful, longitudinal data (net-of-fees returns, participant behavior changes, cost/benefit analysis), the decision is speculation.
- Not applicable to all plans — For smaller plans or those without participant engagement challenges, the cost/complexity may outweigh benefit.
- Use as one tool, not the panacea — It may play a role in a broader strategy (education, defaults, participant tools), but should not replace fundamentals like plan design, contribution encouragement, and strong default options.