Managed Accounts 2.0

By James Smith

On Oct. 9, Morningstar Investment Managementheld its first managed accounts symposium forconsultants to explore how managed accounts canhelp provide the personalization that allowsindividuals to determine how much to save, makeinformed investment decisions, and thenspend down sensibly. Our retirement thoughtleaders presented our latest research, includingthat on default investments showcased in “DefaultInvestments: Made to Stick” on Page 40. Panelsexplored the role of retirement plan consultantsand advisors in implementing and evaluatingmanaged accounts offerings for plan sponsors.

The final panel of the day brought in the perspectiveof plan providers who have teamed upwith Morningstar Investment Management to offermanaged retirement account services. BrianCosmano of Empower Retirement, John McGlynnof Charles Schwab, and Bridget Witzeman of Voya Financial joined me to discuss innovative waysto help improve services for plan participants andhow managed accounts may evolve. Ourconversation has been edited for length and clarity.

James Smith: Bridget, we’ve talked before abouthow this isn’t all about numbers, investments,and saving rates. Could you share what you’ve toldme about the emotional side of supportingmanaged accounts?

Bridget Witzeman: I listen to phone callsfrom participants calling in to either understandthe advisory services program or to checkin on their account. I want to keep my thumbon the pulse of our end consumer. Nine times outof 10, those calls end with an “I feel” kind ofstatement: “I feel so much better having talkedto you … I’m happy that I have a retirementplan or a strategy in place.” It’s very much aroundemotions rather than analysis. That samething occurs any time you’ve got market volatility.We get calls from people who need validation.They need that reassurance. One of the additional benefits of the managed account program isproviding this emotional component of support.

Smith: I wanted to touch on that aspect before wedig into recent innovations. Let’s start with theidea of the dynamic qualified default investmentalternative, or QDIA, which allows plans to use botha target-date fund and managed accounts asa default. Younger participants would be defaultedinto the target-date fund and then switched intomanaged accounts at a certain age. Brian, can you giveus some background on what Empower is doing?

Brian Cosmano: We introduced the idea ofdynamic QDIA about two years ago andimplemented it in our platform about a year ago.Today, we have over 150 plans using dynamicQDIA as their default. The reception has been verypositive across different markets; 20% ofour new plan sales now on our Empower Selectproduct are using dynamic QDIA.

The transition from target date to managedaccount is most commonly between the ages of 45 and 55. The 45-year-old camp is focusingmore on savings rates, because if you waituntil 10 years before retirement, you’re never goingto save enough to get there. The 55-year-olds aremore focused on the spend-down capabilities.Managed accounts come with a lot of spend-downcapabilities, and that gets much more importantas you get closer to retirement.

Smith: Bridget, can you talk about how VoyaFinancial has targeted managed accounts re-enrollmentfor certain groups of participants?

Witzeman: Where we've seen great interestis in a number of our large and megaplans. Plan sponsors view the re-enrollment ofparticipants over age 50 into the managedaccount program as an engagement strategy.They've recognized that this is an at-riskpopulation. Many of these participants are notcurrently in the plan's default; they've gota hodgepodge of assets. Many of them arecarrying higher-than-appropriate equity exposures,and a lot of plan sponsors are concernedthat these participants may not be sufficientlyprepared for changes in the market.

Many participants haven’t thought about theiroptions when they hit retirement. Can theykeep their money in the plan? How do they createa withdrawal strategy? What to do about SocialSecurity? Re-enrollment into the managed accountprogram is a great opportunity to engageall of these participants, to have that dialogue.

To help support them, we developed fairly sizableplan-specific communications and promotions,with advisors sent out to meet participantsface to face, outbound phone calling, inboundcall-routing approaches, as well as a lotof education around what the service can do.

Customized Advice Smith: Why not just default plan participants intomanaged accounts from the beginning?Granted, the fees are higher than target-datefund expenses, but as my colleague Dan Bruns haspointed out, 80% of those fees would be paidwhen the participant is over age 40. The fee in theearly years is not that large from an absolute perspective, and they'd get the impact ofincreased savings rates for a much longer periodof time.

John McGlynn: That's a fair assessment. If I putthem in a target date to start with, they maynever get the right savings level, and thatcould be far more harmful to them than the feeof a managed account. That's why we'vebeen a huge proponent of getting participantsinto managed accounts as a QDIA from thebeginning. If we give them the option to go inlater, it just doesn't happen. Help themgenerate the proper level of savings, and thatcould far outweigh any cost differential.

Smith: Advisor-managed accounts may be thefuture. With these accounts, rather than MorningstarInvestment Management building the asset allocationand doing the fund selection, the RIA firm doesthat work. John, what feedback has Schwab gottenon advisor-managed accounts?

McGlynn: Firms that initially expressedno interest are coming back to us now. There arechallenges for them. One is accepting thelevel of fiduciary responsibility that they're goingto take on. Two, many of them, particularlyin the smaller space, are concerned about theirability to manage the exposure that theyhave. But a lot of these firms are now takingdeeper dives.

Everybody has been experiencing tremendousfee compression. Firms that were on thesidelines have now come to the plate, in largemeasure because they’re looking for alternativesources of revenue. One of the best waysto do that is monetize your intellectual property.If you’ve been building portfolios your entirecareer, why not get paid for that?

Smith: The goal is that the end user will get betterservices, better-diversified portfolios, and appropriateportfolio savings rates.

Cosmano: On Jan. 1, we'll have the first moneyin the door for our advisor-managed accountsprogram. We've seen a significant amountof interest from what I would call theadvisor aggregators. Three or four different firmsare talking about resetting blocks of booksin the billions of dollars into dynamic retirementmanager and advisor-managed accounts.

Perhaps just as exciting is some of theunique investment philosophies that they’re usingto construct the portfolios. We’re seeing firmscreating special collective investment trusts thatare constructed just for managed accounts, withvery sophisticated investment options in them.They can’t be used directly by participants but canbe used as a part of the managed accounts.

But while some firms are willing to take onparticipant-level fiduciary responsibility, a lot ofconsultants aren’t. We have repositionedwhat we call advisor-managed accounts upmarket;we call it open architecture-managed accounts.Our advised assets group retains the fiduciaryresponsibility to the participant. The consultant isresponsible for building the asset allocationand fund-specific portfolios used in managedaccounts, but that’s their only role. We arestill the fiduciary, working with MorningstarInvestment Management to put participants intothe right portfolio. We think that is goingto be a much more powerful strategy at market.

Smith: Do you have an obligation to vet whatthey’re doing?

Cosmano: Absolutely. We as a fiduciary arehiring a subadvisor. We have a review process thatwouldn't look, say, too dissimilar to whenone of our investment teams is looking at astrategy as a subadvisor.

Automate Wellness Smith: Another topic we're hearing a lot about in theindustry is financial wellness.

McGlynn: We don't view this as a product.We view financial wellness as approachinga participant, an individual, in a holistic manner.A managed account is one of many toolsthat ought to be in the tool chest to help themachieve what they want to achieve, insideof a wellness program.

Cosmano: First, a disclaimer: This is not officiallyon Empower's road map. These are my thoughtsalone. That said, I was here at Morningstarwhen it acquired a bit of HelloWallet, which hassince been sold off. As a part of the team thatlooked at HelloWallet, one of the things that struckme about financial wellness is that it is much likewhere investment advice was before managedaccounts came around. Financial wellnessadvice is a wonderful tool, but not a lot of peopletake advantage of it because it requires too muchwork. Automation drove the shift from adviceto managed accounts. When you're thinking aboutfinancial wellness, figure out how to automatethe advice that you're giving.

If you look at our participants across our recordkeepingplatform, the vast majority of themhave significantly more debt than they have assets.Making good debt decisions isn’t that hard,right? If you’re paying 19% on a credit card andyou could get a loan at 8%, that’s about 1,100 basispoints saved right there. I guarantee you thatis more than any managed accounts fee. Whatwe’re looking to do is get a better read intoparticipants’ liabilities and then to partner withbanks to see how we can improve that balancesheet almost automatically. For example,if we see you’re in a bad debt situation and there’san opportunity to improve that debt, we cansend you a message for approval, you click abutton, and you’re paying less in interest. The vastmajority of plan participants would benefitmore from liability advice than from asset advice.We as an industry just need to figure out howto automate it.

Smith: Bridget, Voya’s myOrangeMoney programarguably incorporates components of financial wellness.What you are looking to do there?

Witzeman: As we think about financial wellness,it's not just a tab in the participant experience.There's been some element of financial wellness inthe things that we have been doing for manyyears. What's new and different are the tools thatare being made available, which moves it fromeducation to diagnosis and implementation—what you called "automation," Brian. We view it as being able to act on the recommendations weare making. Whether it's the debt side, whetherit's an emergency savings fund or insuranceneeds, it's being able to establish a mechanism forimplementation. Because if you don't set thatup, people are not going to take that action-orienteddiagnosis and go do it on their own. They justdon't. People get it. They don't act on it. What'sreally going to be the game-changer for financialwellness is moving from education to being able toimplement those recommendations.

We view managed account services as one sleeveof financial wellness. It’s part of supportingretirement, your overall asset allocation, andspend-down strategy.

Smith: Full disclosure, our research group is workingon something that they call Next Best Dollar,which is about helping you best allocate your futuresavings. Do you have methodologies to determinewhether to pay off credit cards, or save in a healthsavings account or a 529 plan or 401(k)?

Cosmano: We have our best-interest profile tool.It's a very basic strategy. One of the easierthings to do on the liability side of the balancesheet is pay off high-interest loans first,absent behavioral considerations. That's primarilywhat it looks at. We also have some logicthat looks at the benefits of an HSA versus a401(k) versus taxable accounts.

Witzeman: What may be logical for a participantto do may not be what they're willing toact on. If we're not improving outcomes becausewe're serving up what the academic bestchoice may be even though participants won'ttake action on it, then we're really not achievingthe ultimate goal. Perhaps the appropriatealgorithm changes over time as you learn moreabout that participant. Are you going to comeup with a different solution that they might havea higher likelihood of taking up?

Smith: What are you doing related to HSAadvice, whether from a savings perspective or on theinvestment side?

Cosmano: Empower partnered with a bank tolaunch the Empower HSA. We see the same needfor help that participants have with theirdefined-contribution plan. It's a little bit further down the road, but we see managed accountsbeing able to work across your HSA, your401(k), an IRA, and a taxable account, so that youhave a very holistic plan.

McGlynn: Managed accounts are a tool thatcan help us across all those channels.People really only want one tool. Let's build anumbrella over it all so that we can do it fromone point of entry.

Smith: How do you support this from the humanaspect? We can build great online systems, but there’salways a significant subgroup who usually wantsto talk to someone.

McGlynn: This is borne out by researchwe just published, showing that 81% of peoplewant to work with a firm that's easy toget a hold of. Somebody's going to ultimatelywant to pick up the phone.

Cosmano: One of the things we learned withthe dynamic QDIA is that you might betransitioning participants who won't even knowthey are now in managed accounts. That'swhy we decided to implement an outbound phone call for every participant that enters into managedaccounts now. Engagement is key, especiallyduring that transition point.

Forging Relationships Smith: What are your plan sponsor clients lookingfor today?

Witzeman: One of the first things thatyou always hear is, "How many of my participantsare you talking to or giving guidance to?"We look to measure the impact that we're havingon participants, and plan sponsors wantto see more of that information. They wantto understand what kind of personal informationparticipants are providing and howthat is impacting the recommendationswe're making.

McGlynn: By frame of reference, the bulk ofmy activity during the day is dealing withconsultants. Most of my questions sound muchlike "Prove it to me." You said you're goingto improve outcomes; now show me that you did it.Let's talk about cost vis-à-vis any otherproduct that's available. Ultimately, that comesthrough the plan sponsor, because they're takingguidance from their consultants.

Smith: Do you see an interest in interactiveuser experiences, where there is someone who walksparticipants through the process in understandableeveryday language?

Witzeman: I do. We're seeing the userinterfaces evolve over time toward greatersimplicity, everyday language. Nobodyspeaks the way we do. Incorporating moreconsumable bits of information in a giveninteraction is really important.

But digital alone is not always going to besufficient, no matter how simplified we make it.There is tremendous value to the phoneand face-to-face interactions. Digital is great, andthose who are willing and able to self-servedo. But there are many more people who wantsomebody else to be right there with them,to do it for them. I’m going to come back to wherewe started: It’s sometimes about emotions,not about logic.

McGlynn: All the research shows that whenit comes to a key decision, people wantto talk to somebody. If you could have the perfectwellness system, it would answer one question:What do I do? I listen to the phone calls;I have the joy of sitting right outside one of our callcenters. That's the only question that's beingasked: "What do I do?"

Cosmano: We focus a lot of time on thedigital experience. That's a huge part of theEmpower pitch. But when you look at thepercentage of participants who use the websiteinstead of interacting via other means,it's not as high as the amount of time that wespend on it. Most plan participants haveno clue what managed accounts are. So to me,it's less about improving the existing experienceand more about educating participantsabout the help available within the plan. We as anindustry would be better served focusingon that aspect as opposed to the digital experiencefor now.

Smith: What’s different about what you’re deliveringas participants are transitioning to retirement?

Cosmano: I don't think we've seen much changeover the last couple of years. If managedaccounts could be more holistic, incorporatingIRAs or taxable accounts that participantshave, it would provide more flexibility. That'swhere innovation will come from. For example,plan sponsors have been hesitant to addguaranteed income products, and I'm not surethat's going to change in the future. So tous, it's about looking at that holistic pool of assetsand investing in such products elsewhere.

McGlynn: Ultimately, where managed accountshave the greatest potential impact may bein helping people with the deaccumulation side.We all understand the purpose of a 401(k)is to save money and get the biggest balancepossible by the time you quit working. Thenwhat? I have no room for error. I have no timeto make up. What's going to give me confidencein how I do my spend-down? What toolsor products should I have to help me get there?Help with deaccumulation has vastly morebenefit and value in the long run than help withsaving money.

Smith: Do you see an interest in addressingthe retirees? That can be a mixed bag from sponsorto sponsor.

Witzeman: It really depends upon the averagetenure of employees in that plan. We seesome plans where most participants have beenworking at one company their entire career,and plan sponsors are paternalistic, wantingto make sure that those employees are handledwith the appropriate care in retirement.Where employees are more seasonal, in and out,the plan sponsor may not have a desireto have that ongoing fiduciary responsibility.

Plan sponsors have historically acknowledged thatthere is a vast array of different participanttypes, styles, and needs in their plan. So, theyoffered managed accounts, but there was maybea little hesitancy to promote it. I believewe’re seeing a fair change in that, particularlyas there are more participants who aregrowing close to retirement, who need somesupport, who are emotionally tied to thatmoney and need to feel confident thatthey won’t run out. Half the time, participantsdon’t even know that this service is part ofthe managed account.

There is a lack of understanding around theservices that are available to transitionyou into retirement and to help you throughretirement. Sponsors are becoming moreaware of this fact. We’re seeing a lot more support,promotion, and discussion from plansponsors to their employees about the service,because they’ve recognized that in the end,it can really benefit participants, and keep themwithin the plan even after they retire.

This article originally appeared in the December/January 2019 issue of Morningstar magazine. To learn more about Morningstar magazine, please visit our corporate website.

James Smith is head of workplace products and strategy at Morningstar.