When is a Managed Account NOT Managed? When It’s a QDIA.

Although managed accounts (MAs) are the second most popular qualified default investment alternative (QDIA) with $450 billion, they are far behind the most popular $4 trillion in target date funds (TDFs). A new hybrid Personalized Target Date Account (PTDA) combines the two approaches and is the new product.

There are two distinct types of managed accounts. Both are called “managed accounts,” but one is not actually managed

1. Truly managed accounts require decisions from participants who typically take advice from live investment consultants. They are not QDIAs because these participants do not default.
2. By contrast, defaulted people do not engage, so managed accounts for them are not actually managed, despite the fact that they are called “managed.”

This article details personalization with a strong caution against trying to personalize what cannot be personalized because It’s Not Nice to Fool Mother Nature with a “managed” account that is not actually managed.

QDIAs are best constructed as custom model PTDAs

Defaulted participants will not talk to us so we can’t know their risk preference/tolerance, but most MA and PTDA providers pretend to know by using recordkeeper data as a proxy – they use age and wealth without ever talking to the participant. This data reveals risk capacity, which is the ability to take risk, but the correct input is risk tolerance which is the willingness to take risk.

The fact is that wealthy people with high risk capacity want to stay wealthy, so they have low risk tolerance. Similarly, poor people with low risk capacity want to stop being poor, so they have high risk tolerance. Simply put, personalization for defaulted people does not work and – even worse – it could do them harm by doing the opposite of risk tolerance.

MAs and PTDAs do not work for defaulted people; calling them QDIAs does not change the fact that pretend personalization does not work. It’s Not Nice to Fool Mother Nature. The better approach for all defaulted people is to customize rather than personalize. The plan sponsor, along with its advisors, tailors a model glidepath to serve all defaulted people, using the funds that are on the plan platform. Yes, it’s still one-size-fits-all but designed to follow DOL guidance to match the QDIA to plan demographics.

Non-QDIAs are personalized

Non-defaulted participants do want to engage. They want to tell us their risk tolerance. MAs and PTDAs work for self-directed people. About a third of the assets in TDFs is from self-directed people, confirming that many non-defaulted people like the construct of a lifetime glidepath. These people can manage their own unique glidepath through time, changing risk level and target date at will.

Personalized lifepath management using PTDAs

Unlike most target date funds  with a single glidepath, PTDAs come with an array of glidepaths with varying risks, such as those shown in the following. Participants in PTDAs can move from path to path at any time and they can blend paths. They also change their target date anytime. They manage their own unique lifetime paths through time, adjusting to life events as they occur.

The “Industry” shown in the graph is the S&P target date fund index aggregate of all TDFs. It is 85% in risky assets at the target date with 50% in equities and 35% in long-term bonds. By contrast, the “Conservative” glidepath is 20% risky at the target date. It is like the glidepath followed by the Federal Thrift Savings (TSP) TDF, and others.

Conclusion

The description “managed account” is not correct when applied to the accounts of defaulted participants  because you cannot manage assets for people you don’t know and who will not talk to you. But  that is what is happening. Truly managed accounts are being viewed as the same as unmanaged accounts, and that’s a mistake.

This matters because there is a push in retirement savings plans toward personalization because investing is personal. The idea of the movement is solid but current implementations are not. Personalization can help self-directed participants manage their own unique lifepaths and it can be used to customize a single glidepath for all defaulted people as a QDIA, but it can’t manage defaulted accounts.

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