Getting the Most Out of Defined Contribution Managed Account Services | ISG

Defined-contribution plan sponsors in the enterprise HR Benefits team play a crucial role in managing the defined-contribution plan. Acting in the best interest of the plan participants is a fiduciary/legal responsibility and includes carefully selecting service providers to fulfill their fiduciary responsibility.

Enterprises that use managed account services – the investment management service that simplifies the investment process and optimizes returns for defined-contribution plan participants – must still make some critical decisions. In particular, plan sponsors sometimes struggle with whether to choose a recordkeeper (i.e., Alight, Fidelity) or a sub-advisor (i.e., Edelman Financial Engines) for managed account services. This provider is responsible for managing some or all the investment decisions in a fund.

The following pros and cons will help plan sponsors evaluate their options.

Pros for Using a Recordkeeper for Managed Account Services

1. Direct access to data for real-time account balances, fund performance and other participant data
2. Integrated solutions for a more seamless participant experience and potentially less administrative work for the plan sponsor
3. Potential cost savings with bundled services for using the recordkeeper’s proprietary product
4. Unified and streamlined communication with participants

Cons for Using a Recordkeeper

1. Lack of confidence that the financial advisors providing investment advice have the same level of expertise as a sub-advisor
2. Potential insufficient resources to offer a financial advisor hub or ill-suited client-to-advisor ratio
3. Concerns about financial advisors “pushing” proprietary funds if the recordkeeper is not willing to agree to contractual protections

Pros of Using a Sub-Advisor for Managed Account Services

1. Specialization by a sub-advisor whose primary business is to offer customized investment strategies
2. Greater independence if sub-advisors do not own insurance companies that get referrals from the job

Cons for Using a Sub-Advisor

1. Potential higher overall costs
2. Added complexity for the plan sponsor for having multiple providers

One important item to note, plan sponsors are concerned about biased advice. Both recordkeepers and sub-advisors can promote their own or a related party’s investment options, which is a conflict of interest.

Recently, the managed account landscape has seen a great deal of change due to advancements in technology – including AI, data analytics capabilities and user-friendly platforms. It has also sharpened its focus on participant-paid fees, expanded its range of investment options, undergone regulatory changes relating to investment advice and, more recently, experienced market volatility, which has increased the demand for personalized advice.

It would be beneficial for the plan sponsor to compare the recordkeeper and sub-advisor offerings to the current plan with the following considerations:

• The plan sponsor’s specific needs
• Preferences of plan participants
• Structure and offerings of the managed account provider
• Regulatory and fiduciary considerations
• Contractual protections

Defined contribution managed account services can help enterprises and HR teams fulfill their fiduciary responsibilities to offer wise investment choices to their employees and help participants maximize their investment portfolios. Discerning which one is best suited for your organization can make a difference that more closely aligns with the goals of enterprises’ retirement plan. ISG helps companies navigate these offerings and find the right fit. Contact us to find out how we can help.