Set It and Forgot It? Plan Sponsors Need Hands-On Engagement for Review of Solutions that Allow Participants to be Hands-Off

What Should Our Plan Be For When We Get There?

Five years ago, the U.S. Department of Labor (DOL) published Target Date Retirement Funds – TIPS for ERISA Fiduciaries. ” Using this as a backdrop, we believe a plan sponsor’s primary concern should be evaluating the portfolio management process of the providers. This is an obvious statement when considering “investment only” solutions such as target date funds. However, under ERISA 3(38) status, a managed account provider is also an investment manager.  Similar to the recent trend of TDF evaluation focusing on fees, we have found that evaluations of managed accounts providers have often focused primarily on behavioral factors, engagement, and ancillary services, while neglecting the investment methodology that is being implemented in a discretionary role with participant assets. For example, many plan sponsors are not aware that there is an incredibly wide variation in how each managed account provider reflects contribution levels, account balances, outside assets, and pension benefits. With that said, behavioral engagement and more holistic financial support is favorable for those participants who are actually engaged with the managed account provider. However, our research shows that there are major gaps in the information most participants give to their managed account provider, which limits the ability to personalize their asset allocation.
 
In order to simplify an often complex discussion for sponsors, we suggest using a consistent evaluation methodology and execution approach across all investment managers of asset allocation solutions (e.g., TDFs and Managed Accounts) based on the following criteria:

1. Glide path/risk level appropriateness
2. Asset class diversification
3. Implementation (e.g. active, passive, or blend)
4. Underlying manager selection
5. Reasonability of fees based on value provided

The critical starting point for both a Managed Account and a TDF is the time horizon of the participant.  Without any other participant engagement or sufficient data feeds, both investment solutions will be similar.  This result is commonly called a “glide path.”  Keep in mind that a solution used as a QDIA, where the “D” stands for Default, is often synonymous with an unengaged participant.  For that reason, plan sponsors should be comfortable that the investment allocation methodologies are sound and worth the fees. We have found this to be particularly problematic for managed account providers, whose methods for personalizing asset allocations vary significantly across the industry, suggesting that there is no established best practice. Further, they have created the impression that more personalized data is being provided than we believe is occurring. As a result, plan sponsors need to dig deeper than just to trust a managed account provider’s “black box.”
 
The key factors underlying each of these criteria allow plan sponsors to determine which areas they view as most important and evaluate providers. These criteria are not only useful when selecting a new provider, but also can be a powerful lens to view the existing provider’s ability to drive retirement outcome for participants.  By doing this, plan sponsors and their fiduciaries will remain focused on where the puck is going and delivering optimal tools for their participants.
 

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^{[1] Vanguard – 2018 How America Saves, data as of December 31, 2017}

^{[2] PSCA’s 60th Annual Survey of Profit Sharing and 401(k) Plans; Data shown is for plans with 5,000+ participants; data as of December 31, 2016.}