Unmanaged QDIA Managed Accounts

The definition of managed account is “an investment service where a financial expert oversees assets on your behalf, where you set the financial goals and risk level, and the manager makes daily choices to meet your goals. [1, 2, 3, 4]”.

Serious confusion has arisen regarding the term “managed account” in 401(k) plans, especially as it relates to qualified default investment alternatives (QDIAs). The Pension Protection Act of 2006  specifies that a “managed account” can be used as a QDIA. But bear in mind that a QDIA is for people who will not talk to you, so you can’t know their  financial goals and risk levels – their preferences.

The Act makes a mistake that has led to serious confusion.

An account can be managed for non-defaulted/self-directed  participants because they do want to talk to you. But it can’t be managed for defaulted participants because they don’t want to talk to you. Confusingly there are two kinds of “Managed Accounts” – actually managed for self-directed people and unmanaged  for QDIAs (yes, an unmanaged managed account).

Unmanaged QDIA managed accounts

This flavor attempts to substitute recordkeeper wealth data for investor preferences, assuming that because the wealthy can “afford” more risk they want to take more risk. This approach confuses risk capacity with risk tolerance/preference. Just because we can afford risk (capacity) doesn’t mean we want to take more (tolerance). Most wealthy people like being wealthy, so they don’t want to risk losing it. Some poor people may want to take risk because it could make them un-poor.

So-called “managed” accounts and “personalized”  target date accounts that use recordkeeper data rather than investor input are not truly managed, at least not in the ordinary sense of the word because they rely on wealth rather than true investor preferences. Faulty inferences result in bad risk decisions.

A better way

 A more sensible managed account is designed for people who do want to talk to you – the self-directed people – and to provide a suite of risk-based glidepaths from which to choose. These people tell you their risk preference and their expected retirement date, and you do the rest.

For those who have defaulted into a QDIA,  the 401(k) sponsor designs a unique custom TDF QDIA for all, thus conforming to DOL guidance to match the TDF glidepath to the demographics of the workforce. Specifically, the sponsor chooses the appropriate risk for the QDIA by blending Conservative-Moderate-Growth glidepaths, plus setting a retirement age for all who default.

Conclusion

The TDF industry is an oligopoly where 4 firms manage more than 75% of the $5 trillion total, so the host of competitors struggle for an angle to take market share. “Managed” QDIA accounts is one of those gimmicks. It should not stand because “It’s not nice to fool Mother Nature.”