Quick Summary
A managed account is a service in which an investment manager builds and maintains a portfolio for an individual participant, usually from the plan's existing fund lineup. Managed accounts can be offered as an opt-in service or used as the plan's default investment, and they typically charge a fee on top of fund expenses. The value depends heavily on how much personal information the service actually uses. Plan fiduciaries are responsible for prudently selecting the provider, evaluating its fees, and monitoring whether participants benefit.
A target date fund gives every 45-year-old in the plan roughly the same portfolio. That works well for many people, but employees at the same age can be in very different places. One has a pension from a prior job and a spouse with a large 401(k). Another is starting from zero and plans to work until 70.
Managed accounts are designed to address that difference. Instead of assigning a portfolio by age alone, a managed account service builds an allocation for each participant. The idea is appealing. Whether it is the right fit for your plan depends on cost, engagement, and how much personalization participants actually receive.
How a managed account works
A managed account provider uses information about each participant to build and maintain a portfolio, usually from the funds already on the plan menu. At a minimum, that information typically includes age, salary, account balance, and contribution rate, which the recordkeeper can supply automatically. Many services also allow participants to add details such as outside savings, a spouse's accounts, expected pension or Social Security income, and their own risk preferences.
The provider then sets the allocation, rebalances over time, and in many cases offers suggestions on savings rates and retirement timing. Providers commonly act as an ERISA 3(38) investment manager for the accounts they manage, which means they take fiduciary responsibility for the investment decisions within each participant's account.
Opt-in or default
Plans generally use managed accounts in one of three ways:
- Opt-in service. Participants choose to enroll, and only those who sign up pay the fee.
- Default investment. A managed account can serve as the plan's qualified default investment alternative, so participants who do not make an election are enrolled automatically.
- Hybrid default. Sometimes called a dynamic QDIA, this approach defaults younger participants into a target date fund and moves them into a managed account at a set age, when personal circumstances tend to diverge more.
Each structure involves different trade-offs in cost, participation, and communication.
The fee question
Managed account fees are charged in addition to the expense ratios of the underlying funds. They are often a percentage of the account balance, sometimes on a sliding scale. In some arrangements, part of the fee is shared with the recordkeeper, which is worth understanding because it can create a conflict of interest in how the service is offered.
The core question is what the fee buys. If most participants never provide information beyond what the recordkeeper already has, the resulting portfolios may look a lot like a target date fund for the same age, at a higher total cost. If participants do engage and the service uses that information meaningfully, the personalization may justify the expense. Because the fee applies to every dollar in a participant's account, it deserves the same scrutiny as any other plan expense.
Questions to ask a provider
Before adding a managed account service, plan fiduciaries should be able to answer:
- What is the provider's fiduciary status? Get it in writing, including whether it acts as a 3(38) investment manager or a 3(21) adviser.
- What data does it use? Ask what percentage of current users add information beyond what the recordkeeper provides.
- How different are the portfolios? Ask for examples comparing managed allocations with the plan's target date fund for participants of the same age.
- What does it cost, and who is paid? Get the full fee schedule and any revenue the recordkeeper or other parties receive.
- How easy is it to leave? Participants should be able to opt out at any time without penalty.
- What reporting will the plan receive? You will need utilization and engagement data to monitor the service.
Who tends to find it useful
Managed accounts are often more relevant for participants with more complex situations: those closer to retirement, those with significant outside assets, and those whose household picture differs from a typical employee of the same age. Younger participants with simple situations may receive a portfolio similar to a target date fund regardless.
That pattern is one reason some plans use a hybrid default or offer managed accounts on an opt-in basis rather than enrolling everyone.
Monitoring after you add one
Selecting the provider is not the end of the process. Fiduciaries should review the service at least annually, including how many participants use it, how many have added personal information, how fees compare with alternatives in the market, and whether the provider's methods or ownership have changed. Document the review the same way you would for any investment on the menu.
Managed accounts and personal advice
A managed account is not the same as working with a financial planner. It manages the investments inside one plan account, sometimes with planning tools attached. Employees who want help with broader decisions, such as Social Security timing, taxes, or coordinating multiple accounts, may need more than the plan service provides. Participant education and access to advice can complement either approach.
Wondering whether a managed account fits your plan? Brian Williams, CPFA®, of Northshire Consulting LLC | Registered Investment Advisory Firm helps business owners evaluate investment services and their costs. Call 203-401-6062, email bwilliams@northshireconsulting.com, or visit northshireconsulting.com to schedule a plan review.
Frequently asked questions
Can a managed account be our plan's QDIA?
Yes. A managed account service is one of the four types of investment that can qualify as a QDIA, provided it meets the Department of Labor's requirements and participants receive the required notices.
Does a managed account replace the target date fund?
Not necessarily. Many plans keep a target date series on the menu and offer managed accounts alongside it, either as an opt-in service or as part of a hybrid default.
Who is responsible for investment decisions in a managed account?
If the provider serves as an investment manager, it is responsible for the allocation decisions it makes. The plan sponsor remains responsible for prudently selecting the provider, reviewing its fees, and monitoring it over time.
This material is for educational purposes only and is not individualized investment, tax, or legal advice. Advisory services are offered through Northshire Consulting LLC | Registered Investment Advisory Firm.