We’ve had some interesting feedback lately about whether managed accounts are even acceptable as a QDIA. Our first thought was “whaaat?” Back when the concept was first legislated in 2006 that might have been a reasonable question. But since the final ruling on the subject in 2007 the DOL regulations have been very clear on the types of funds or services can be used as a long-term QDIA:
- A product with a mix of investments allocated based on age or retirement date, such as a “life-cycle or targeted-date-retirement fund.”
- An investment service that allocates available fund options based on age or date, such as “a professionally managed account.”
- A product designed for the group of employees as a whole, such as a so-called balanced fund.
Now, the second item definitely covers managed accounts as we know them. We’d want to clarify that GuidedChoice makes investment decisions based on the account holder’s overall financial situation, of which age is just one component. But the sense still seems obvious. So what’s the problem?
Timing is Everything
It seems that even though managed accounts have been available for over a decade, the retirement services market still does not fully understand them. Perhaps this is just a matter of timing. Target date funds were introduced at roughly the same time, and because they appeared to be a simpler solution to the same problem, they were more quickly adopted. So today when the market is looking for a straightforward, compliant, all-in-one investment vehicle, it thinks ‘target date funds.’
The early leader isn’t always the best choice for the future, however. Fiduciaries and the media have recently discovered the challenges of focusing solely on a fixed or hypothetical retirement date as a prudent approach to financial guidance. An arbitrary implementation of the “glide path” to retirement is one key problem, which became painfully clear when large numbers of people approached their target dates during a deep recession.
Dr. Harry M. Markowitz, GuidedChoice’s “chief inspiration officer” who helped design our advice methodology and engine, never thought TDFs were an optimal solution because time horizon is just one of several criteria that can be used to place an investor’s portfolio on the Efficient Frontier.
A better solution requires more information. It provides a more thorough analysis that can account for variables such as the timing of inflows and outflows of cash, and delivers a more personalized solution. Short of a live advisor, only a managed account can do this. Importantly, the GuidedChoice managed account solution also recommends a savings rate as a part of the advice component.
Act Like a Fiduciary
The DOL is very clear that “the selection of a particular default investment alternative…is a fiduciary act,” and that fiduciaries must act prudently on the behalf of participants in choosing one. It’s unfortunate if awareness of that responsibility, and perhaps a desire to avoid any unnecessary effort in meeting it, has caused anyone to choose the simpler, more limited alternative from the ‘approved’ list.
It’s always been our position that being a fiduciary means not simply meeting the letter of the law but its spirit as well. The DOL has affirmed that managed accounts are a prudent solution. We believe they’re the most prudent option available. And the market is coming around: managed accounts are currently used as a QDIA in more and more 401(k) plans across the country. Many plan sponsors are moving toward managed accounts specifically because they’re finding target-date funds inadequate as a one-size-fits-all solution to a complicated set of concerns.
Weigh the Options
Those who would minimize the appropriateness of managed accounts point to higher costs, issues such as operational complexity and monitoring requirements, and greater risk. Regarding cost, our data show that our costs are actually equal to or lower than TDFs, partly because we use the investment options already in the plan rather than a selection bundled by a fund provider. And any hypothetical costs could easily offset by the greater long-term effectiveness of managed accounts in building wealth and getting people safely to their financial goals.
While there may be some (little) truth to operational concerns, setting up managed accounts is easier than most people seem to think. Monitoring is a challenge for both, but in one important sense it’s easier for managed accounts because you can monitor actual retirement income outcomes. Finally, with a provider serving as co-fiduciary (as we do), risk is simply not a concern. And it’s hard to see how a one-size-fits-all solution could ever be less risky than a personalized one.
In any case, the regulations say nothing about choosing “the easiest possible solution to implement.” Quite the opposite: To act truly and solely on the behalf of plan investors, fiduciaries need to weigh all the potential options, balance costs and benefits, and not shy away from a little analysis and decision-making. Anything less, we would argue, is simply not prudent.