Trends in Managed Accounts with Cerulli’s Shawn O’Brien

In this episode, Bill is joined by Shawn O’Brien, associate director, Retirement at Cerulli, a research and consulting firm specializing in asset management and distribution trends worldwide. Leading the U.S. Retirement research practice, which focuses on the defined contribution and individual retirement account markets, Shawn also leads and supports strategic consulting projects for asset managers on their DC-related market entry and product distribution strategies. With that, we thought we’d take this episode to discuss recent trends and data behind managed accounts, a solution growing in importance for both employers and their plan participants.

Bill Harmon is a registered representative of Voya Financial Partners, LLC (member SIPC). 

Neither Shawn O’Brien nor Cerulli are affiliated with the Voya® family of companies.

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Transcript

Speaker 1: 0:01

You are listening to the Hire Through Retire podcast with Voya's Bill Harmon tackling all things from 401ks to HSAs and everything in between. We are talking to the best and brightest in the industry to bring you the latest in benefits, savings, and investment trends in the workplace. Come along with us on our journey to help all Americans become well-planned, well-invested, and well protected.

Speaker 2: 0:25

Hello everyone and welcome back to the Hire Through Retire podcast. I'm your host, bill Harmon, and thank you so much for joining me here today. You know, we are here today to talk about a topic that many of our followers have likely heard about over the past few years, and, and that's managed accounts. It's a topic in a solution not only growing in popularity, but also in importance for both employers and their plan participants. With that, we thought we'd highlight some of the recent trends and data behind these solutions. And to do that, we're bringing in some industry expertise. So joining me today is Sean O'Brien, the associate director and Retirement at Surs is a research and consulting firm specializing in asset management and distribution trends worldwide. John leads the US retirement research practice, which focuses on the defined contribution and individual retirement account markets. He also leads in support strategic consulting projects for asset managers on their DC related market entry and product distribution strategies.<laugh>, John, we've got the right person here, so lemme welcome you to our chat and thank you so much for joining us on the pod today.

Speaker 3: 1:30

Yeah, thank you Bill for having me. This is, uh, really exciting.

Speaker 2: 1:34

Many of us have heard of Saru, particularly for deep in this business. Great work and research that you've done, John, but it would be really good to hear a little bit more about your experience in this industry and how you landed at cli.

Speaker 3: 1:47

Yeah, sure. So I came to CLI in, um, 2019. Prior to that I was a researcher at Harvard Business School, so I was co-authoring case studies for a course called Investment Management for Institutional and individual investors with a couple of, um, finance professors at Harvard Business School. And, um, so I was writing a lot of cases, a lot of teaching notes for cases on these, on this topic. And we really ran the gamut of investor types as the, uh, name of the course entails. So we were looking at, you know, huge pension plans and, and pension risk transfers as well as, you know, robo investing and retail investing. So I really was interested in the defined contribution largely because of that, because when I think about the DC market, it's really the intersection of individual and institutional investing. You've got the institutional inve, uh, plan, um, and you've got the individual investors who are at the end of the day making their own investment decisions to a certain extent on behalf of themselves within the plan. So I think the interest between, you know, behavioral finance and those types of things, and also institutional investing and having that kind of fiduciary oversight were both kind of, uh, really intriguing aspects of the defined contribution market for me. And so I joined cli, um, and I also was just really, you know, a research oriented person. Naturally surly was a, was a great fit for me and I joined back in 2019 on the retirement team. I now oversee the retirement practice. That's really, we have, uh, a great team and some great colleagues on that team, so very happy to be there.

Speaker 2: 3:23

Well, obviously you're the right person with that kind of background and, and passion, you know, and, and there's such a need in this space to where we know that employees are overwhelmed with decisions. And so why don't we start by talking a bit about how to help with that emotion of the decisions when it comes to investing and so on. And, and that's really, uh, one of the big items in that is the manage account solutions and the whole landscape. So specific to the DC space, there's a lot of opportunity with manage accounts and that's why everyone's talking about it. So what does Saru report in terms of manage account availability and how's that grown over the recent years?

Speaker 3: 3:59

Yeah, so we've looked at it in, in two different ways from a, from an adoption standpoint and from a, you know, statistical standpoint. So we have one our 4 0 1[inaudible] plan sponsor survey. So, uh, that's a survey we, we've been running for years now. We've run it annually. We survey over 704 0 1[inaudible] plan sponsors across plan asset segments. Most recently it's nearly half of 401K plan sponsors indicate they offer a a managed account. Secondarily, we also survey DC consultants, so that's your big institutional investment consultants. So Mercer, Aon, Callen, firms like that, but also your aggregators. So, uh, sage view, cap trust firms like that, when we survey that panel, that that percentage jumps up to about 52%. So about 52% of all consultant intermediated plans, uh, DC plans, not just 401k plans offer a managed account, their most commonly being offered as an opt-in solution. So very rarely are they being offered as the Q D I A. It's in the low single digits. About 3% of consultant intermediated plans offer, uh, the managed account as the Q D I A a slightly higher percentage, about 5% say that it's being offered as part of a dynamic Q D I A, which I think is an area where we've seen, obviously the magnitude of adoption is still pretty limited there at 5%. But when we look at some of our other data sources over the past few years, as well as this new data source we've gotten from our DC consultant study, which we just launched this year, it has ticked upward. So there does seem to be a little bit, a little bit of an uptick in adoption of dynamic Q ds over the years, even though it's not widely pervasive at this point.

Speaker 2: 5:40

It, it is a growing space and a growing demand for the solution. And, and I think one of the things I, I just saw a survey result that employee anxiety just in general over the finances has have really grown recently and the number one reason for that was inflation. That they're just really looking to say, wait a second, my dollar's not going nearly as far. Am I saving enough for what things will cost down the road? And so that might be a contributor to maybe a greater need. So, uh, ney for managed accounts, that is, so based on your research, what are some of the top reasons why employers would offer managed account services to their workforce? And do you hear from plan sponsors that there's a growing employee demand? Maybe based off what I just said, or maybe is it just not as well known on the, um, participant side?

Speaker 3: 6:26

Yeah, well I'll start off by saying, um, we do see in terms of inflation, this is a little bit outside the scope of your question, but you mentioned it when we survey retired 4 0 1[inaudible] participants and we asked them what their top stressor is, inflation is number was number one this year in 2022 by a pretty good margin. Our data kind of, you know, agrees with what you're seeing in terms of why plan sponsors offer managed accounts. When we, we surveyed 4 0 1[inaudible] plan sponsors last year, the most common reason was to offer their participants', uh, retirement income planning guidance and advice essentially. So helping them with retirement income planning was the most common reason, followed by just a, you know, something that's more customized if the participant wants it. So something that's more tailored to the participants' needs than maybe a a target date fund was. That's the second most common response. On the participant side, we don't have really a lot of hard data around that. What I will say is that, you know, I don't know that a large percentage of of participants really fully understand what a managed account is. You have to think about it, you know, we're in this industry where we talk about target date funds and managed accounts all the time and customization and, you know, glide paths. Uh, but if you think about the everyday participant, um, they may not, you know, really be able to kind of decipher from between a managed account and some other professionally managed, uh, solution, whether it's in plan or in the, in the retail market. So I'm not quite sure or I'm not quite convinced that there's widespread knowledge of managed accounts amongst DC participants. And really the record keeper on one is, is really probably the only one that's introducing them to the idea of the managed account. In a lot of cases. I don't think it's necessarily, unless maybe the employer is for certain plans that really feel strongly about the managed account, but um, yeah, I don't think a lot of participants really probably have a great understanding of what the managed account can deliver for them.

Speaker 2: 8:22

I'm sorry, I might be giving away my a bit here, but this is my 35th year of being in this industry. In the beginning it was the, the product that we had had seven funds and four of them were fixed. So there was a lot of complexity in creating some asset asset allocation decisions, but we've seen a really good evolution, you know, fund, uh, menus got larger, in fact probably got too large. And then how do I make these decisions? And then you get these sort of passive asset allocation and then you get, you know, target base where there's a little bit more of a dynamic, um, asset allocation, but then the next level of, of evolution's exactly how you talked about it with managed accounts. And so when you look at that and say, well, wow, we really saw a target date fund popularity just grow, but it wasn't immediate. It took some time to understand what this does and why is this good for me. But the next level of evolution is managed accounts. And there there are unique benefits between the two for one managed counts has the ability to consider outside assets and not just consider, you know, basically how old are you, um, or when you plan to retire, but really think about things from outside assets or, um, spousal income or accounts, that kind of a thing. So I guess maybe can you share more about what you've found when you look at those two? Is there, are there ways that they can compliment the two different products, target dates and managed accounts or you know, do they conflict or what's your, what do your studies show you on that?

Speaker 3: 9:47

Well, I certainly think, and our, our data would suggest that there are ways that the managed account can compliment the target date fund. We asked target date managers specifically, uh, a series of to, to agree or disagree with a series of statements related to managed accounts. And there's usually year after, after year, pretty good percentage that say, Hey, look, managed accounts can be a compliment or complimentary to our target date series. At the same time, you also have a large number of target date managers who indicate that managed accounts are too expensive, uh, relative to target date funds. Obviously that's a biased panel cuz they are target date managers. But I think there's an element of truth there, especially in a very fee sensitive market that we're in, you're ultimately going to be paying for personalization. There's a premium associated with that. So I think as we move forward in that premium for personalization has kind of come down over the years, the value proposition of managed accounts has increased and I think over time managed accounts going to be looked at as more of a viable Q D I A or component of A Q D I A particularly as I mentioned before, within a dynamic Q D I A where it could be the, the tail end of that, that dynamic Q D I A, the second, uh, phase so to speak. I think that's where you're going to see a lot of, you know, a really compelling sell for managed account providers is on the, on the tail end for, for participants nearing retirement. So you're also at the same time seeing some asset managers partner with managed account technology providers. So we've seen pimp o and American Funds partner with Morningstar to offer personalized target date funds. And you know, that sits, you know, if we think about a, a personalization spectrum that's really, uh, will every once in a while publish and we've published it in a recent, um, thought leadership piece. I would say personalized target date funds kind of sit somewhere between the full-blown managed account and the traditional off-the-shelf target date fund. Now you mentioned one of the differences there, which is being able to take outside infor outside accounts and you know, non plan information into the picture when you're delivering and tailoring that asset allocation and advice to the participant in a managed account. That's something that a full-blown managed account can offer, but a personalized target date fund isn't necessarily doing yet. So there's just so many, there are so many factors as participants are heading into retirement that need to be taken into account that I think that's where managed accounts can really differentiate themselves from other Q D I A eligible solutions. I think the real challenge there, it's been a challenge thus far and I think moving forward it's gonna be a challenge when we talk to managed account providers is participant engagement. So in order to get those outside assets into consideration, those outside accounts, you need the participant to engage, um, at least once you know, directly and, and thoroughly with the program. Um, and I think that's going to be, you know, the real key moving forward is how do you get the participant to give you that information so that you can offer that more tailored experience. So I, you know, obviously record keepers and managed account providers are, are working on that and I think that's going to be really where you see the difference in value, uh, that comes with personalization between the managed account and target date fund, uh, become most apparent.

Speaker 2: 13:07

And if you don't really get involved, it is just an expensive target date because it doesn't exactly have any, you keep using the word personalized, the manage account technology doesn't know who you are as a person, then it doesn't know how to create that customized asset allocation that really takes in so many other components in consideration. Right. I love how this talked about evolution. You know, we, we talked about this where we went from a target date to a full-blown manage account. Maybe there was something in between with more of a personalized target date. Maybe another level of, of evolution is this new idea of advisor manage accounts that's scheming a lot of popularity because that really gets to getting better engagement. If you've got an advisor manage account program on being offered by an advisor that's giving one-on-one participant guidance and advice, that's a really good tool to help get those participants more engaged. The tool and technology allows them to really factor in additional participant information, just like what we were talking about. And so does Saru then report out on a trends in the growing interest of advisor managed accounts as we're looking at this baby from the advisor consultant lens and maybe as to how visor managed accounts might compliment their offering in the DC space?

Speaker 3: 14:19

Uh, yeah, we do. Um, and we've really just recently started to scrape together some interesting data around advisor managed accounts because, you know, big picture is they're relatively new. They've only been really around for a few years now. And at a high level what we've seen, and, and this is kind of, you know, not breaking news here, but it's, it's largely a lot of your retirement aggregator firms who have been most active in the advisor managed account space. From the intermediary perspective, what we did this year is in our new DC consultant study, we asked consultants if, uh, about their top strategic priorities. And we found that when we cut the data by institutional investment consultants and aggregators, um, aggregators were much more likely to note advisor managed accounts as a top strategic priority for them. So growing that business when we sized adoption was about 3% of consultant intermediated plans offer an advisor managed account. While on the surface that doesn't sound very high, uh, these are also very new. They're, I think, largely being offered in certain segments of the market rather than, um, you know, across all market segments. So I think the mid-market is probably we're gonna, you're gonna see the most, uh, action there. If I had to guess moving forward, just based on the types of intermediaries who are, who are really most active in this space. And when we ask, basically we, we gather, uh, managed account asset data from a couple different sources. One, we have our managed account leader board, which has all the top managed account providers and we, we publish that in our quarterly edge series. We also, um, asked record keepers about managed account assets on their platforms of the record keepers we surveyed this year in the fourth quarter of this, this year, there was more than 8 billion in advisor managed accounts, uh, on their platforms compared to a little more than 480 billion in traditional managed accounts. So, uh, still a, a pretty small slice of the managed account pie, so to speak. But I think when you think about how really, uh, nascent this trend is, it is, you know, a good amount of traction, pretty significant traction, I would say over, over, you know, what a two year period since they really started coming to market. So definitely interest to a certain extent there is some level of adoption. And I think, you know, when you think about all of the different stakeholders who are at play within a, a managed account program and specifically an advisor managed account program, you know, you have a lot of vested interest. The advisor, it offers the advisor and opportunity to introduce certain financial planning services, uh, to participants who might benefit from those services as they're nearing retirement. The record keeper is obviously, you know, going to partner with the plan advisory firm to offer this type of solution in the managed account platform provider. Um, and so all of those parties have an interest in, in delivering this, this kind of, um, added benefit to participants. But I think specifically when we think about the advisor managed account, the ability for the advisor to say, Hey, look, participant, look, we can offer these types of financial planning services outside of the plan if this is of interest to you. I mean, it could be situation situationally within the plan or outside the plan. So I think it's just, you know, kind of one more resource for participants, especially as they're narrowing retirement and they need that, that added support. I do think there's a compelling value proposition moving forward for advisor managed accounts. I just don't know if you're gonna see it across all plan asset segments

Speaker 2: 17:45

During this conversation. We've talked about different types of employees and how manage accounts can benefit them. We've talked maybe about those maybe with smaller balances or those that are uncomfortable, um, making a as allocation decisions. But we also talked about those that are nearing retirement where, oh boy, I'm coming up to this, this moment. I don't wanna take a lot of risk. What's the appropriate amount of risk? How do I do this? But there's also, all of this is talking about accumulation, and I think the industry's done a good job on helping employees figure out what the right amount of accumulation is, and every, uh, record keeper's website and planning tool can give them that number and transfer that into a monthly income and retirement. But then really even more important, the Deion now that I've got this, um, dollar amount that pay the calculator told me that I did it, how do I take this money out and by the way, spend wisely and don't run out. And so are there any trends that you're seeing, you know, with the rise of managed accounts that can actually support this concern? I, I gotta imagine everyone nearing that magical date is saying, oh my goodness, now what? So maybe you talked about this, um, generation right here and some of the trends you've seen that can help them with decumulation.

Speaker 3: 18:59

Yeah, certain, when we, when we talk to managed account providers, um, and we, we look at their solutions and, you know, see what's under the hood, a lot of them have done, you know, made really great strides in helping participants plan for retirement. That retirement readiness offering those kind of guidance based, uh, experiences within the managed account related to social security and, and, and other accumulation, you know, really tough accumulation decisions. You know, I think the, the area where we talk to managed account providers where, you know, they're looking to innovate is on turning that, that nest egg into a paycheck in retirement and doing it in a really tax smart way. You know, an example of that is perhaps financial engines income, but beyond retirement, they came out with that earlier this year. They had income plus for a while. Income beyond retirement is in, in my eyes, just a, you know, an enhanced version of income plus where, um, there's kind of a growth component and an L d I component from a portfolio management standpoint, but you're looking at accumulation in a holistic way. And that's the key. I think that accumulation is just really, there are just so many interrelated decisions and tough decisions that participants have to make the managed account, in my eyes, if we think about, you know, creating retiree friendly plans and, you know, certain plan sponsors wanting to keep participants in plan in retirement, I think the managed account, uh, is, is going to be or should be a very valuable tool for participants who are heading through retirement because there are just so many decisions around how to plan for healthcare, because healthcare expenses are enormous in retirement, when to claim social security and how social security should factor into your drawdown phase, how you should be withdrawing from various accounts, um, in a, a tax smart way. All of these considerations, and when you think about inflation, you know, we mentioned at the beginning of our chat, you know, social security income is one of your best inflation hedges that you have, you know, in your quiver. So I think that, uh, for participants just understanding that and, and understanding how social security, you know, something as simple as social security can, can help them offset, uh, to a certain extent their, you know, inflation risk. It could be, can be, you know, enormously helpful. So, you know, I think that, you know, I, I'm a big believer in managed accounts being, you know, something that's going to play a central role in retiree friendly plans moving forward, especially for those plans that want to keep, uh, retirees, uh, in plan.

Speaker 2: 21:32

I guess in other words, you thought that trying to decide how to go ahead and, um, allocate your assets amongst these 30 funds, you thought that was difficult,<laugh> now determine where to go ahead and appropriately take on a tax efficient basis or tax optimized basis from these five different accounts and make sure you don't run out. Exactly. You're right. That's a, that's a talk about personalization. You know, Sean, this has really been a great conversation. I, I wanna thank you so much. This has been really great background for the audience and helping provide a state of the state on, on this really important topic of managed account solutions. So if I could, let me wrap it up by asking one final question. You know, we've talked a lot about the trends that you've seen, uh, to date. Is there anything employers should think about from a trends perspective on the horizon, particularly as we look to the new year?

Speaker 3: 22:20

You know, I think there are two things that come to mind if I, I know this is you're asking me about one trend. I'll give you two. One thing that's top of mind for me right now is e s g, you know, we just had the, uh, the final rule come out from the D O L. So I think there's gonna be a lot of, you know, for plan sponsors and fiduciaries in general who were maybe hesitant to do anything on that front because they didn't know how that final ruling was going to look. They have at least, um, they have some clarity at least in the near term until, you know, we, maybe there's a change of guard in a couple of years in the, at the D O L and in the White House, right? But, you know, I think that's one where I'm, I'm really, um, that's really top of mind for me and I think in the industry right now. Um, and I think personalization is also another, another big one. You know, I, like I said before, you've had a couple target date managers come out with personalized target date funds. I think there are gonna be more target date managers that come out with personalized target date funds partnering with Morningstar or other managed account providers like that. But I also, you know, you also see other asset managers who are, who are leaning into that personalization. And so I think that's gonna be an area where asset managers, if they're looking to differentiate themselves from other asset managers in this crowded space are gonna look and say, Hey, look, how can we deliver something that's, um, more tailored to the individual than a typical off-the-shelf target date fund? And how can we do it at scale?

Speaker 2: 23:39

Yeah, and I, I agree with you, personalization, of course, the data requirement to go ahead and really deliver something personalized. Yeah, those are big, big topics. I wanna thank you again, Sean, for your insight today and for joining us. This has been a great conversation.

Speaker 3: 23:53

Wonderful. Yeah, yeah. Pleasure to, to be on here, bill. Thanks so much for having

Speaker 2: 23:56

Me. Absolutely. And I also wanna thank our listeners for joining us today. As always, please stay well.

Speaker 1: 24:02

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