Custom Made Retirement

Executive Summary For plan sponsors and participants navigating the “new retirement,” managed accounts (MA) present an attractive solution with their twin features of customized investment portfolios and personalized participant advice. Using a wider range of participant data, managed accounts help deliver more efficient, appropriate portfolios for participants of all ages. Read on to see why the use of this strategy continues to grow as both a standalone menu option and as a designated qualified default investment alternative (QDIA).

What Are Managed Accounts? 2

The Rise of Managed Accounts 3

Managed Accounts Can Work for All Ages 4

Benefit #1 – Customized Portfolios 6

Benefit #2 – Personalized Advice Services 7

Getting Participants Engaged 8

Plan Sponsor Considerations 9

2DC Rising · New Dimensions in Defined Contribution

TODAY’S GROWING EMPHASIS ON FINANCIAL WELLNESS MAKES MANAGED ACCOUNTS AN ATTRACTIVE SOLUTION for both plan sponsors and participants. By combining the value of customized investment portfolios with personalized advice, managed accounts can help optimize participants’ retirement savings, investment allocation and income generation strategies. Whether offered as an option on the plan menu or as the plan’s designated qualified default investment alternative (QDIA), managed accounts provide a level of individualization that one-size-fits-all target date funds (TDFs) can’t match.

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ManagedAccounts

Customized discretionary

portfolios

Personalized advice

services

A managed account is a customized discretionary portfolio that is managed for a defined contribution (DC) plan participant based on personalized inputs from (primarily) the plan’s recordkeeper and (secondarily) the participant. Sponsors can access managed accounts programs through a growing number of recordkeeping platforms, financial service firms and third-party service providers.

Depending on the provider, managed accounts often include personalized advice services that can be accessed via an online portal or mobile app and in-person through call centers or on-site advisors.

By combining customized discretionary portfolios with personalized advice, managed accounts can help participants create more wealth at retirement. Even after incorporating fees, managed account participants have historically seen higher account performance compared with those self-directing their accounts and TDF users.1

By using managed account advice, 7 in 10 participants increased

their projected 10-year retirement wealth by an average of 23%

net of investment and advice fees.2

1 Morningstar, David Blanchett, PhD, CFA, CFP®, The Impact of Managed Accounts on Participant Savings and Investment Decisions, 2019.2 Vanguard, How America Saves 2021: Insights to Action.


The Rise of Managed AccountsManaged accounts have become an overarching solution for both investment and planning advice, with fiduciary oversight. Many plan sponsors view them as a value-added way to provide participants with additional choice and personalization: 65% of sponsors who offer a managed account program rated their top reason because participants simply prefer the added service. And, they like the idea of giving

participants access to a more customized option than TDFs, especially older employees with large account balances.3

By the end of 2020, managed account availability rose to 49% across plans of all sizes, up from 6% in 2005, with 87% of large or mega plans embracing them at the highest rate.4

Managed Account Assets Growth in DC Plans

Availability of Managed Accounts in DC Plans, 2020

322%increase

Source: Callan Institute, 2021 Defined Contribution Survey.

Source: Pensions & Investments, Managed Accounts Slow to Gather Steam, April 2020.

$108BILLION

2012

2019

$348.3BILLION

3 Cerulli, US Retirement Markets 2020.4 Callan Institute, 2021 Defined Contribution Survey.

All plans <5,000participants

5,001 to 50,000participants

Plans with >50,000

participants

49%

0%10%20%30%40%50%60%70%80%90%

100%

42% 40% 87%


Managed Accounts Can Work for All AgesParticipants of all ages who use managed accounts tend to save more for retirement within optimized portfolios. According to Morningstar research in which they applied a 40-basis point (bp) managed account fee on

top of underlying investment fees, the average participant might expect to have more wealth at retirement than those who aren’t part of the program.5 For example:

Managed accounts are often touted as a solution for a large portion of late-career participants (ages 50 to 65) and retirees. These older investors with higher plan account balances tend to have complex financial needs that call for a more personalized solution. For example, helping them create an efficient

drawdown strategy typically calls for more nuanced (ongoing) planning that considers their lifestyle, Social Security optimization, pension benefits, spousal income, and other outside assets, in addition to their DC plan account balance.

As more employees and sponsors adjust to the new idea of “retirement,” where workers may phase into retirement over time versus a hard stop at age 65, more companies are seeing the benefits of retaining participants in-plan versus the old days of just offering a final lump sum distribution at retirement. Today, an overwhelming majority (81%) of plan sponsors prefer that their employees stay-in-plan in retirement, up from 8% in 2010.6 By retaining retirees’ (often higher) account balances,

sponsors appreciate that they can leverage plan scale to negotiate better pricing for all participants, not just retirees.

Offering a managed account program could help as an additional “stay-in-plan” benefit: Employees using the service will transition well into retirement via ongoing access to advice and personalized portfolios at a lower cost in-plan than in the retail market. Outside of the plan, they would likely end up paying higher advisory and investment management fees.

Older Participants with Complex Portfolios

5 Research looked at 60,825 DC participants using Morningstar’s managed accounts platform from January 2007 to June 2018. Morningstar, David Blanchett, PhD, CFA, CFP®, The Impact of Managed Accounts on Participant Savings and Investment Decisions, 2019.

6 Callan Institute, 2012 and 2021 DC Trend Surveys.

20.8 million US households between the ages of 45 to 69 hold

between $100,000 and $2 million in investable assets. For this

group, close to 60% of their investable assets are in retirement savings.

The average 30-year-old participant had

during retirement more annual income

$5,548 The average 60-year-old

participant had

during retirement more annual income

$690

Source: Morningstar, David Blanchett, PhD, CFA, CFP®, The Impact of Managed Accounts on Participant Savings and Investment Decisions, 2019.

Source: Plansponsor, Cerulli Foresees Increased Use of Managed Accounts in DC Plans, March 2019.


One new approach to help tackle the retirement challenge as participants age within the plan is a Dynamic (or hybrid) QDIA. This option automatically converts participants, unless they opt out, from a default TDF into a managed account structure when they reach a predetermined trigger identified by

the plan sponsor, such as age 50 and/or with at least $50,000 in their account. While we’re in the beginning stages, this evolution in automated plan design is a consideration as more sponsors look to provide more holistic, customized options as their workforce nears retirement.

• Managed accounts are more likely to remain invested during periods of volatility than those not in such accounts.8

• The additional value from reducing negative behavior could be up to 60 bps for engaged managed accounts participants, and up to 40 bps for unengaged participants.9

While younger (ages 25 to 45) participants tend to have less complex planning needs to start, they can also benefit from managed accounts over time. This group is likely to see the largest potential increase in retirement income from a managed account program’s customized savings rate recommendations, personalized risk-appropriate investment portfolios and other services, coupled with the benefit of long-term compounding. This is especially true for younger participants who self-direct their retirement plan investments or use multiple TDF strategies and/or single investment options in an attempt to create a “diversified” portfolio.

On The Horizon: The Dynamic (Hybrid) QDIA

Younger Employees Benefit, Too

During the market volatility of the first quarter in 2020, younger employees actively enrolled in managed accounts at a higher rate than normal: 65% of newly enrolled members were under the age of 50.7

7 DCIIA, Managed Accounts, What to consider when selecting a QDIA, November 2020.8 Brian Cosmano, “Made to Measure: Evaluating the Impact of a Retirement Managed Account,” Great-West Investments, Empower Institute, June 2018.9 Edelman Financial Engines Data Warehouse as of March 31, 2020. Published in client “Insights” June 2020.

Many managed account providers have recognized the need to evolve their personalized advice components to address additional financial wellness issues – such as student loans, debt management and emergency savings – weighing heavily on early and mid-career participants.

Managed accounts can help participants of all ages avoid emotionally charged investing mistakes, such as market timing, inefficient portfolios, and overly conservative or aggressive investment strategies. Given the recent pandemic experience, this can be an important consideration, as studies show:

Triggering Event Step 2Step 1

The participant is initially defaulted

into the plan’starget-date QDIA

based on age/targetretirement date.

The participant is moved into a

managed account QDIA that provides a customized asset

allocation based on marital status, additional assets,

any defined benefit plan, tax

implications, planbalance and other

information provided.

Age, years of service,account balance, etc.Ideally, it should be

at a time the participant is more

likely to engage.

Source: Plansponsor, QDIA in Transition, January 2018.


Interestingly, remote workers in 2020 (defined as working from home full time) were more likely to use managed accounts versus a plan’s TDF default. Research suggests the difference could be explained by the demographics of remote workers, who tend to have higher incomes and, as such, are less likely to use the

default investment.10 As remote work becomes more mainstream, with almost a quarter (22%) of the US labor force expected to work remotely by 2025,11 plan sponsors might consider including managed accounts on the investment menu to encourage increased engagement with the plan.

Managed accounts reflect a comprehensive and customized view of an individual’s demographics and financial picture overall, offering a holistic approach to managing their retirement future.

The Rise of the Remote Worker

Benefit #1: Ongoing Personalized Discretionary Investment Management

More Data = Better Portfolios

The Managed Account Value: A Personalized Investment Solution for Participants Seeking Advice

Managed account services are geared toward “do-it-for-me” investors who desire greater personalization.12

The “core” service of managed accounts is related to investment portfolio management. Compared to TDFs, which focus on the average participant using just one data point (e.g., age, usually in five-year increments), managed accounts create personalized portfolios based on a much wider range of data provided by the recordkeeper, plan sponsor and, in many cases, the individual participant.

This allows for:13

• More efficient portfolios: Managed account participants tend to have more efficient portfolios (Blanchett 2019) and reduced allocations to employer stock (Pagliaro 2018).

• More appropriate portfolios: Managed account providers can leverage data for ongoing, finely tuned asset allocation and risk levels that better reflect a participant’s individual situation, especially as they age and their financial picture becomes more complex.

Once retirement plan participants chose a managed account, their portfolio construction improved. For these participants, being in a managed account portfolio eliminated extreme equity allocations and improved international and fixed income diversification.14

While each managed account provider has different data requirements, most managed account portfolios are based on an individual’s already-known information within the recordkeeping system with additional input as needed from the plan sponsor. With some managed account providers, participants can provide additional information online to further tailor their personal investment plan. This is typically done through an online portal, with the flexibility to update their information as their life changes. If a participant prefers not to provide this additional information, the managed account provider will manage the investments using the recordkeeper’s available data.

10 Morningstar, “Out of Sight, but Not Out of Mind; Helping remote workers with retirement managed accounts.” January 2021.11 Stanford Institute for Public Policy Research, Nicholas Bloom, June 2020.12 Callan Institute, 2021 Defined Contribution Survey.13 Morningstar, “Out of Sight, but Not Out of Mind; Helping Remote Workers With Retirement Managed Accounts.” January 2021.14 Vanguard, How America Saves 2021: Insights to Action.


Managed Account Personalization – Who Provides What

Of course, the more a participant engages with the managed account platform, the greater the level of customization. However, using only the recordkeeping data already in the system

can generally create a more efficient and participant-appropriate portfolio than either an age-based TDF or the average self-directed effort could.

AgeSalary Savings rates Plan balance Employee deferrals Employer contributions

GenderLoansYears of plan tenurePension benefitsCompany stock balanceLocation

Risk tolerancePotential or desired retirement ageSpousal assetsOut-of-plan assetsHealth factors

RECORDKEEPERS PROVIDE: PARTICIPANTS PROVIDE:

Benefit #2: Access to Personalized, Holistic Advice and Planning

The Advice Continuum: The Challenge of Participant Expertise

Highest LowestRequired Participant Expertise

Customized Portfolio Construction

When constructing portfolios, some managed account providers use the plan’s investment options to develop a group of portfolios for varying ages (e.g., model portfolios). Others construct portfolios on a more individualized basis, using the risk/return characteristics of the plan’s investment options, based on what they know about each participant.15

Providers can use more than just the core menu investments and build portfolios with best-in-class strategies across the DC plan’s menu, or even strategies outside of the plan. Depending

on plan sponsor input, providers can blend passive funds to minimize investment expenses and use actively managed funds to increase or decrease risk and associated returns.

If the plan’s investment committee replaces a single investment option on the plan’s menu, it will most likely change as well within the managed account. This benefits sponsors as they have already spent time and effort conducting proper due diligence on selecting the replacement fund. This is not the case with prepackaged or proprietary TDFs.

It’s well known that investment self-selection (defined as a participant creating their own asset allocation portfolio) corresponds with the worst retirement outcomes for the typical participant and requires the highest participant expertise, which they often don’t have.16

Personalized advice can significantly impact a participant’s financial and emotional outcomes. The extra layer of advice offered through the managed account can be viewed as financial advice that could help participants achieve their savings and retirement goals.

15 DCIIA, Managed Accounts, Due Diligence and Implementation Considerations, September 2020.16 Morningstar, The Optimal Default for Defined Contribution Plans, June 2015.

Self-selectionTarget Risk

Funds

Target Date

Funds

Advice/ Managed Accounts

Financial Planner

Source: Morningstar, The Optimal Default for Defined Contribution Plans, June 2015


Many of today’s managed account providers also offer more holistic financial planning services in addition to portfolio management. Depending upon the managed account provider, managed accounts can offer:

• Optimized savings rates guidance by encouraging participants to increase their deferral rates and/or a higher use of the employer match.

• Tax-efficient investing strategy guidance (e.g., asset location or tax-loss harvesting) for a participant’s plan assets, or for their complete financial picture.

• Actionable, online calculators and tools that can help investors better assess their overall financial position (e.g., budgeting, cash flow statements, balance sheets, goal analysis).

• Financial wellness guidance to tackle student loans, budgeting, emergency savings, savings for a child’s education and more. This is especially appealing to younger participants.

Managed accounts can also help navigate the daunting complexity of the income drawdown stage in retirement, where participants must decide what to draw from, and when. Depending upon how much the participant wants to engage with the provider – such as including the list of outside sources of income not in the plan (e.g., spousal assets, social security, outside IRAs or 401(k)s, etc.) – the managed account can also provide specific recommendations relating to overall retirement readiness and drawdown strategies across all taxable and non-taxable assets available. The best part? Participants can start this planning process well in advance of their actual retirement age. At any stage of the journey, this level of advice is typically available to managed account participants regardless of their life stage.

Getting Participants Engaged When first offering a managed account program, determine which participants will have access across age ranges, account balances, or any other criteria. Then, create a segmented communication strategy across various touchpoints to make each segment aware of the option, explaining what it is, outlining any additional fees, and ultimately how they might benefit.17 The plan’s consultant/advisor and recordkeeper can help with this process.

Beyond age and/or account balance, consider looking at how many participants are using multiple TDFs or are allocating to core-menu investments beyond their existing TDF allocation in an attempt to create a diversified portfolio on their own. These employees are trying to create a more customized allocation but often lack the investment sophistication to do so.

Since managed account participants see each of the underlying investments within their managed account portfolio on their quarterly statements or online, this helps them see a diversified portfolio, versus a single investment (e.g., Target Date 2035). Using the benefit of “personalized, professionally managed diversification” in the messaging could also help.

Once they’re in the managed account (whether by default or opt in), conduct a “welcome onboarding” campaign that emphasizes reviewing their profile and sets their expectations for how the service works. Then, offer continuous nudges to inspire them to update their information via the online portal and engage with benefits of the managed accounts service, including the use of intuitive tools that recommend savings rates tied to an income replacement goal, or updating their personal financial information regarding assets outside of the plan.

17 Plansponsor, How and When to Encourage Use of Managed Accounts, February 2019.


Plan Sponsor ConsiderationsFirst and foremost, think about your participants. Working with your consultant/advisor and Employee Retirement Income Security Act of 1974 (ERISA) attorney, determine if customized discretionary portfolios and personalized advice of a managed account program would benefit participants and if so, in what ways. Be sure to document the process and the ultimate factors and decisions made. Keeping in mind that managed accounts are a service product rather than a particular investment fund, there are different criteria fiduciaries must factor in, including, but not limited to, the four below, when considering the adoption and ongoing monitoring of managed account services and providers:

1. Investment Philosophy: Sponsors must review and understand the managed account provider’s investment fund selection methodology, portfolio risk levels, fee structures, various factors that impact personalization, and to what degree those factors impact participant portfolios and their potential to deliver effective outcomes.18

According to the Defined Contribution Institutional Investment Association (DCIIA), a managed account provider will generally be considered an ERISA 3(38) Investment Manager responsible for unlimited liability for their actions in selecting the asset allocation, as well as the investment they assign to that asset allocation. However, as some managed account providers do not take on full ERISA 3(38) responsibility for all parts of the process (e.g., manager selection), the plan’s committee could be assuming more fiduciary risk with one provider than with another.19 As always, the sponsor remains the ultimate fiduciary in selecting and monitoring the managed account provider.

18 DCIIA, Managed Accounts Primer, 2020.19 DCIIA, Managed Accounts, What to consider when selecting a QDIA, November 2020.

Ongoing, look at participant engagement metrics, including online “clicks” and email open rates (i.e., responding to an email sent by the managed accounts service or retirement plan to access a web portal or mobile app). Track calls to an advisor, tool usage (such as determining savings rates), or attending a live or web-based information session. Most importantly, keep track of how often participants engage with the program to update personal information, increase savings rates, include outside assets, etc. All of these metrics can help inform future communications to increase engagement.


2. Cost: Plan sponsors can usually add managed accounts to the investment menu at no cost to the plan. The managed account participant typically pays fees in addition to the underlying investment manager fees that are used to construct a portfolio, typically from the same funds available on the plan’s core investment menu. These fees can vary depending on, but not limited to: The level of service, the investment philosophy chosen, the active/passive funds included in the portfolio, vehicle selection – for example, mutual funds vs. collective investment trusts (CIT) - and the size of the plan.

It’s important to remember – especially when evaluating fees – that managed accounts are a service product rather than a particular investment fund:

• In-plan managed accounts can be a significantly less expensive way for participants to gain a higher level of investment customization and holistic planning guidance: 20

- Advisory fees within managed accounts have come down in recent years and generally range from as low as 25 basis points (bps) to more than 50 bps, depending, in part, on the level of human advisor engagement.

- Asset-based fees within managed accounts are generally lower than what an individual could reasonably expect to achieve in the retail space, where traditional (human) advisory fees continue to hover around 100 bps.

• While managed accounts are generally more expensive than a TDF or other professionally managed options in the plan, they provide additional services for participants, and, therefore, could offer greater value for the fee.21 Keep in in mind however, that fully active TDF suites can be more expensive than a cost-efficient managed account program leveraging plan scale, a CIT structure and an active/passive strategy, among other things.

• Nearly all managed account providers offer a discounted fee for opt-out programs, due to the economies of providing the services to a greater percentage of a firm’s employees, but the size of the opt-out discount varies by provider and may be affected by other factors such as the overall size of the plan.22

3. Opt in or Opt out: If a plan decides to make a managed account service the default for all or a group of its participants, sponsors should consider whether the potential benefits are enough to justify replacing the current QDIA option, as this can vary by plan and demographic mix.

While managed accounts were named one of the three QDIA options introduced as part of the Pension Protection Act of 2006 (target date funds, balanced funds and managed accounts), they are not yet commonly used as the default investment, with estimates ranging from 3% to 7% of DC plans.23 More frequently (87% of all plans), managed accounts are offered as an opt-in feature where participants must proactively elect to use the managed account feature for all of their DC plan assets,24 with 7% of participants choosing a managed accounts program when offered.25

20 Cerulli, U.S. Retirement End-Investor 2021.21 Plansponsor, Cerulli Foresees Increased Use of Managed Accounts in DC Plans, March 2019.22 DCIIA, Managed Accounts Primer, 2020. 23 Morningstar, “Out of Sight, but Not Out of Mind; Helping remote workers with retirement managed accounts.” January 2021.24 Callan Institute, 2021 Defined Contribution Survey.25 Alight Solutions, “The impact of managed accounts and target date funds in defined contribution plans, 2007-2016,” 2018.


Key TakeawaysManaged accounts can help sponsors and participants navigating the “new retirement” landscape through a combination of customized discretionary portfolios and personalized advice. The wider range of data used for portfolio construction gives participants more efficient and risk-appropriate portfolios, while the higher level of personalized advice can help all ages with financial planning in preparation for, during transition and through retirement. Whether offered as a stand-alone option or as the QDIA, managed accounts can help all ages save, plan and invest with a higher level of guidance than they can achieve on their own or through an off-the-shelf TDF.

Partnering with the plan’s consultant/advisor, ERISA attorney and recordkeeper, sponsors can determine if a managed account program is right for their DC plan and participants.

4. Participant User Experience: Last but not least, what will the user experience be? It’s critical to review and understand how participants will interact with the service, what tools and (advice) services are offered, as well as what level of data is available. Important consideration criteria:26

• Evaluate whether, and to what extent, the plan sponsor or the recordkeeper can provide the basic participant demographic information to the managed account provider.

• Understand the importance and value of participant engagement with the managed account provider.

• Determine whether the managed account provider will create sufficient access for plan participants to engage with the managed account program and provide personalization inputs (e.g., via website, mobile device or advisor).

- All user interfaces should be intuitive and actionable.

- There should also be a capability for the participant to share the information with their human advisor, if applicable.

• Identify what is needed to ensure success (e.g., data availability, communication program, investment options, etc.).

• Monitor ongoing engagement to ensure participant value.

• Determine if user portfolios are truly personalized and if the personalization enhances the portfolios in ways consistent with the sponsor’s views. Also, determine if users have beneficially changed their savings rates.

26 DCIIA, Managed Accounts, Due Diligence and Implementation Considerations, September 2020.


DC Rising is the Lazard Insights Magazine for the new retirement imperative.

Information and opinions presented have been obtained or derived from sources believed by Lazard to be reliable. Lazard makes no representation as to their accuracy or completeness. All opinions expressed herein are as of the published date and are subject to change.

Certain information contained herein constitutes “forward-looking statements” which can be identified by the use of forward-looking terminology such as “may,” “will,” “should,” “expect,” “anticipate,” “target,” “intent,” “continue,” or “believe,” or the negatives thereof or other variations thereon or comparable terminology. Due to various risks and uncertainties, actual events may differ materially from those reflected or contemplated in such forward-looking statements.

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advice, fund management services, an offer of financial products or to enter into any contract or investment agreement in respect of any product offered by Lazard Asset Management and shall not be considered as an offer or solicitation with respect to any product, security, or service in any jurisdiction or in any circumstances in which such offer or solicitation is unlawful or unauthorized or otherwise restricted or prohibited. This article is intended for U.S. audiences only.

The article is for general information only and is not intended to provide investment, tax or legal advice, or recommendations for any particular situation. The article reflects circumstances as of August 2021, and readers should be aware that subsequent developments may have affected the discussion and statements in the article. Please consult with a financial, tax or legal advisor about your circumstances.

Important Information

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September 2021

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Custom Made Retirement