Managed Accounts Are Underutilized as Retirement Plan Defaults: Towers Watson

They can also provide access to asset classes and strategies outside the core lineup, like private real estate, long-duration bonds, annuities and diversifying strategies. "These would include strategies that have attractive properties from a portfolio construction perspective, but may be too esoteric to add to a DC structure as a standalone option for fear of participant confusion or misuse," according to the paper.

Utilization is low, though, for several reasons. The biggest one is fees.

The two biggest considerations in choosing a TDF, according to research from Towers Watson, are the glide path and fees. Managed accounts address the first issue by considering the participant's individual circumstances, but the "second most important consideration for sponsors — fees — is clearly working against them." The paper noted that managed accounts in large plans typically start at around 50 basis points, while smaller plans tend to have larger fees. Towers Watson argues that because many plans offer advice to participants for free, those who use the managed account have to question if the advice they receive is worth the additional cost. "Since participants have access to the majority of the provider's services at no cost through the advice tool, is the additional layer of fees reasonable? Some participants may consider this a suboptimal trade-off and would require a lower fee to consider using managed accounts for their ongoing portfolio management," according to the paper.

Sometimes fees are lower for a managed account when a sponsor plans to implement them as the QDIA "in recognition of a status quo bias," according to Towers Watson; participants who are defaulted into an investment often leave their money there.

However, the paper noted that this discount, usually 10 bps or more, doesn't lower the cost of a managed account enough to compete with TDFs in that area.

Another consideration is the age of the participant population, according to Towers Watson. Younger participants with less complex needs may be unimpressed by the managed account option, especially with its high fees. Towers Watson suggested that firms that wanted to implement a managed account as a QDIA but were worried about younger participants could default those workers into an age-based portfolio and transition them to a managed account as their needs become more complex.

— Check out In Managed Accounts, Packaged Portfolios Beat Advisor-Driven Ones: Cerulli on ThinkAdvisor.