Rick Unser (00:00:00):

Well, Jason, welcome back to the podcast. Been a little while and excited to hear what you have to say today about this rapidly evolving world of managed accounts.

 

Jason Roberts (00:00:10):

Thank you, Rick. Glad to be back. Yeah, it's, it's interesting, we managed accounts have been out there for least on 401k platforms for over a decade, maybe even 15, 20 years. And, uh, just over the last, oh, I don't know, six months to a year, we're certainly seeing a renewed interest in uptake. So, uh, happy to be here and happy to share some of, uh, some of what we're seeing.

 

Rick Unser (00:00:35):

And maybe just to level set, how would you describe a managed account? Is a managed account a legal term? Is there some type of fiduciary definition somebody should be thinking about when they say managed account or, you know, anything else along those lines? It becomes special when you use, what do you put quotes around those words? Managed accounts?

 

Jason Roberts (00:01:00):

Sure. So, I guess first it would be defined in ERISA, for purposes of the QDIA Qualified Default Investment Alternative rules. Those came out of the Pension Protection Act in 2006. And what that, what that act allowed was for plan sponsors to unilaterally enroll automatically enroll participants into the plan. And you know, the state, state by state anti garnishment laws were really creating a barrier for automatic enrollment. Everybody generally agreed it was a, good result for employees and participants, but it was, you know, you just can't take somebody's paycheck and send it anywhere other than you know, to them directly. And so the Pension Protection Act paved the way and said you can automatically enroll participants and if you want to be shielded from liability, and I'm sure we'll get into this in more detail, uh, that the participant contributions and any match contributions that the employer may make, uh, must go into a qualified default investment alternative. So certainly for purposes of the regulations that implemented the Pension Protection Act, a managed account was defined essentially as a service as compared to a product. And it's a service that uses a mix of equity and fixed income exposures and becomes more conservative over time. So, at least in terms of a default vehicle, managed accounts is defined and it's defined in the way I just mentioned. I think threshold issue is just to think about it as a service and not a product.

 

Rick Unser (00:02:45):

That's a really good way to describe it. And I'm definitely going to steal that one in the future. Again, service versus product. And I, I guess as you think back and you look at this, whether it's, uh, like you said, I think managed accounts had been around for 20 plus years, I think, you know, certainly the Pension Protection Act, I would agree, gave them a little additional nudge or bump. What are you seeing as, as the pros and cons, and I guess as you talk to people, what do they like about managed accounts? What are they still a little bit hesitant about before adding them to a plan?

 

Jason Roberts (00:03:20):

Well if we, if we just consider the last decade or two as 1.0 and we're now entering into 2.0 uh, I'll make the distinction here in a bit, but in the 1.0 version, you know, managed accounts, one of the pros is that they are providing a participant with a customized experience. So if you have two employees or participants, they're all both retiring, let's say in the year 2025, a target date product is going to treat them as having the same goals and timeline and objectives and risk tolerance, etc. But we all know that individuals have varying degrees of financial circumstances. They may send their target retirement date and work beyond. Increasingly we are seeing participants work beyond what would been their normal retirement age. And so the managed account service allows participants to supply additional data points into the system generally through an electronic portal or on, you know, online or even in some cases a printed form that is sent off to the plan record keeper or custodian or uploaded directly to the managed account provider. But what it's doing is it's giving that participant, uh, that's in the managed account service, a different user experience, a different investment allocation at the end of the day, then somebody who is not in the managed account. So that's one of the pros. It's a more custom experience versus a one size fits all approach that you would get with a, uh, with a product. Another pro is that, uh, from a plan sponsor perspective, in any event, if the fiduciary is of the plan are able to demonstrate that they've prudently selected and that they are periodically monitoring the managed account provider. Um, then any wasp is stemming from the management of an individual's participant account. Let's say a participant loses money, they didn't like it and they want to come back and, and you know, hold the plan sponsor responsible for that. As long as there was a, a prudent decision to add the managed account service, the plan sponsor is shielded from liability from the investment related losses because someone other than the plan sponsor is making the investment decisions. In this case, it would be a combination of the participant interfacing with the managed account provider and the managed account provider then interpreting those additional data points or even just the default data points to then trade the participants in account. It's not the plan making those day to day trading decisions. So those are a couple of the generic, you know, sort of high level benefits traditionally associated with managed accounts. And again in the 1.0 model, well cost was one of the cons and we'll couple that cost with the utilization, right? So I'm always hesitant to talk about cost. I think Rick you know from them, from prior episodes costs in a vacuum to me is really meaningless. We really need to be talking about the value and in some cases the value can break down by looking at the background experience, you know, where uh, credentials of that service provider. You can look at the nature and the scope and the frequency of services provided. Look at the needs of the plant or participant lineup, those things. And, and you get to, uh, you know, what is the value of that service? Well cost was higher traditionally, and it still is. Uh, we'll talk about in a minute, uh, for a service, a managed account service versus a product that's, you know, just on a face more commoditized and more easily distributed and doesn't factor in unique considerations. But what is the value when in the context of this, you know, what is a, has been perceived as a negative for managed accounts? The value is the ability to customize that experience. And particularly when we're talking about defaulted participants that are invested in a managed account QDIA, one could argue that those participants weren't engaged enough to even fill out any paperwork or otherwise provide investment direction with respect to their individual accounts.That's why they were defaulted. How could we expect those same individuals to then go into the managed account interface or fill out the paperwork to more, you know, to get the benefit of that additional customization, which was the underpinning of that additional cost. And when I say additional above and beyond what a, a target date fund would do because the target date is also becoming more conservative as that participant ages and gets closer to their retirement date. But the managed account service presupposes a higher level or a higher value relative to that participant that wasn't always being realized. And the last thing I'll just, you know, off the top of my head here in terms of a negative or a con would be that plan sponsors have so much on their plate today that introducing a new service provider, which would require additional due diligence, right. Today plan sponsors are presumably having to collect due diligence and periodically monitor their record keeper, maybe a TPA, a investment advisor, consultant, et cetera. And now a managed account service provider, which is another registered investment advisor, uh, that they have to, you know, keep all and keep track of and make sure that it's somebody that can perform as they say they will in their contract. And so that's sort of been just another, uh, kind of a stumbling block at plan sponsor saying, we have enough on our plate. We don't really want to want to have to vet another service provider.

 

Rick Unser (00:09:07):

And that makes total sense. And, and I think I've talked to this before on the podcast. My general opinion of managed accounts has evolved over the years and, and I think the way I sit today, I think they're a great tool, a great service to use your word and can add a lot of value to participants that are looking for that help. And I guess just to steer into this cause cause I think the positives are there, you know, the positives are kind of like, Hey, you know, this is like grandma and Apple pie. You know, most people can get behind those two is those are great things and yet we're very supportive. Uh, so I think the positives are, are very, very, very much there for managed accounts. But I, I think one thing that I know I struggle with a little bit, and I know some plan sponsors struggle with too, is as you said, the engagement, the extra cost, the, the monitoring. So if you're in that position of a, of a plan sponsor and you're saying, all right, I feel like we have some participants that need this help, I feel like we have people that could really benefit from that extra service, that extra support around investments that's going to come from that additional personalization above and beyond maybe a target date fund. Let's put aside the default piece of it for a second, but just kind of saying, all right, we're now going to start offering this as an option. What level of diligence, what should people be doing? What kinds of questions should they be asking to make that initial decision to add or make this available to participants going forward?

 

Jason Roberts (00:10:52):

So there may be some additional nuances when you're thinking about a QDIA, but a lot of what I already said is just table stakes in terms of the ERISA fiduciary duty, a duty of prudence and loyalty and so forth. So let's assume there's no conflicted loyalty that, that you know, the plan sponsor is and also the, the managed account provider getting any kickbacks, uh, which I think would be very rare. But let's assume it's really just focusing on the duty of prudence. Well, the duty of prudence requires that a minimum that the fiduciary is considered relevant information or that which they should know to be relevant in order to arrive at a well informed decision. And so if you look at DOL guidance over the years, if you look at ERISA and the regulations that we, uh, were published in 2012 further articulating additional depth for plan sponsors under under section 408(b)2, they're, they're really talking to plan sponsors about you need to the arrangement with the service provider, with uh, both with respect to the needs of the plan or participants for [inaudible] as you can enter into arrangements on behalf of the health plan, so long as they are necessary and reasonable and so 408(b)2 clarified what it meant to be reasonable and it says it most must be reasonable both with respect to the terms of the arrangement as well as the compensation received in light of the value of services provided. And so, you know, getting out of the, the technical weeds for a minute, what that really means is plan sponsors have to conduct appropriate due diligence to ensure that the decision to engage that service provider is a prudent one. Does this managed account provider have, uh, have they been in this business? Do they, are they viewed as, uh, uh, you know, as having expertise in this area? Uh, had, do they, are they getting sued by other plans for offering this particular service? You know, are there red flags, et cetera? Do they have potentially, you know, do they have conflicts? Are they getting paid by the investments, uh, that, that they're allocating among and so forth.

 

Jason Roberts (00:13:07):

That would give them an incentive to allocate more to one investment or fund family than another. And so you're really first and foremost looking at that service provider as you would any service provider. Now, then you add on the fact that the managed account is a, it at its core involves exercising discretion over plan investment. So now we know that that service provider is a fiduciary under ERISA. So that pulls in a whole nother set of concerns that plan sponsors should have, which is uh, at a minimum a risk of section four Oh five that talks about co fiduciary liability. So essentially says if you could have or should have in the performance of your fiduciary functions that protected or prevented a breach of another fiduciary, you could be held responsible for that. So you've got your [inaudible] general service provider due diligence, you have your extra layer of fiduciary service provider due diligence, and then you have to understand the inner workings.

 

Jason Roberts (00:14:04):

Actually all of the managed account service. How is it a processing, you know, what are the default settings? If a participant didn't input any information into the system and we just had their age, maybe their income may be dependent on other things that are maybe, uh, facilitated by the record keeping system or the employer uploading information. But what does that experience look like? What, uh, how does it allocate, uh, into a more conservative position as these additional data points are put forward? And so that's a lot of cases, plan sponsors are really going to be very reliant upon their investment advisor. Consultant is sorta deconstruct what might look like as a, it might appear as a black box, but there's some degree of diligence on the actual program itself. And then, um, the [inaudible] piece, you know, is the arrangement reasonable? Are there an, uh, sort of liquidated damages if we terminate the contract early, that would be considered unreasonable?

 

Jason Roberts (00:15:01):

Are there any sort of penalties that are, um, that would be outside of the norm? Then lastly, what is the value of that service? Now that we know all the things about the service provider and we know how the programs are going to work, what are they going to charge for that? And is that reasonable in light of, of similar services being provided by other service providers? So it's really just, you know, it's your core service providers. Select your monitoring duties enhanced by the fact that you now you're selecting another fiduciary to the plan and then lastly the, you know, how did that actual program work?

 

Rick Unser (00:15:36):

Very well said and that's exactly what I thought this might make it a great podcast episode is I think again, surface level, Hey great stuff, great, great extra benefit for participants, but as you get into some of the nuances of things, it can get a little, a little sticky pretty quickly. I mean I guess without completely over complicating things, I mean if I'm a plan sponsor, you know what I'm sitting in that room and it's like, okay, we've made the decision that we want to offer this service, we want to make, make managed accounts available to our participant population. If they're looking at maybe a couple of managed account providers, maybe they have a couple options through their, through their plan record keeper. I mean should they be looking at or asking for things like rate of return that they've maybe generated historically or for other clients? I can imagine. Maybe that gets a little tricky because not everybody has the same investment philosophy or, so when you were talking about the investment piece of it, are there any best practices or thoughts that you would share with people about, you know, how do you kind of put somebody through their paces to make sure they either know what they're doing or their approach aligns with what you think makes sense for your participants?

 

Jason Roberts (00:16:54):

I believe so, but I think it's, it may be isn't as difficult. Well, so let me back up. All of the things that you just mentioned are, are what the deal is that are relevant considerations that must be evaluated to arrive at a prudent, well-informed decision. So if we're looking at track record for example, we want to make sure that, that, that if they are reporting, you know, stratospheric returns, are they taking unnecessary risks? You know, this is probably one where something down the middle is, is, is, is a better bet. So you don't have, you know, the managed account provider chasing returns to be able to win you over based upon performance. You want to make sure that, you know that they're getting adequate returns in light of the risks they're taking on in various levels of, in what I'll just call the internal Glidepath of a managed account.

 

Jason Roberts (00:17:46):

And that that's that sloping line that starts out more aggressive, more, uh, equity allocation and, and ultimately becomes more conservative as that participant age is. So yes, those things are relevant. I think where I, uh, just personally have not seen a scenario where multiple managed accounts are offered through a, a traditional retirement plan record keeper. Generally there's going to be a managed account option a and it's part and parcel I think just because as you said, the adoption hasn't been that great even though they got a bit of a nudge from the QBI rules, but it's costly. That is a fairly invasive, you know, procedure to connect the data from the plan record keeper to feed the managed account system, to create a portal then for participants to supplement, uh, that information and then create another pipeline for the trade instructions to come back in from the managed account provider back into the system.

 

Jason Roberts (00:18:53):

So it's fairly, I think it would be the exception to be comparing multiple managed account providers if you're staying with a single on the InCommon platform. Now that said, if a plan sponsor felt like managed accounts were something that their participants needed and they, you know, they might consider evaluating the managed account provider on the current platform versus the managed account provider on another platform, recognizing if they want it. The second option, they would have to actually move the plan from one record keeper to another. So I think just from a practical perspective, it might be a factor in moving a plan. I've never seen a plan sponsored to help with a project where they're moving solely because of a managed account. You know, maybe that's in the cards when we start talking about managed account 2.0 that could certainly be a consideration.

 

Rick Unser (00:19:45):

Well said. And, and I want to hit on the 2.0 thing in a second here, but I want to come back to something you said and we were just talking about which is to start with, it's like, Hey, you have to make that decision just to offer managed accounts and then there's a secondary decision as you alluded to where okay, well should a managed account be are qualified default investment alternative. And I guess what I'm seeing in the marketplace right now, and I'm just going to go with rough numbers, I, I've seen some numbers but I don't, I'm not going to quote any specific source here. 95% plus somewhere in that range give or take a little seemed to be using target date funds as their QDIA today or as they're qualified default investment alternative today. But I think what the future could hold is as people start to see some of the limitations, real or perceived target date funds that desire for what you just talked about earlier, the customization, people aren't being treated the same way just because they happen to have the same birthday.

 

Rick Unser (00:20:57):

From an investment standpoint, I think some of those messages are resonating in the marketplace. And I think there are some employers who are certainly saying, Hmm, you know, is there a better way to do this and should we be considering a managed account as our QDIA. So before somebody flips that switch, does that mean that managed accounts go through a different level of scrutiny or are there other things they should be thinking about before they flip that switch? Or is it, Hey, you know what, if you're good with a managed account, you're, you're totally fine to have it as your QDIA.

 

Jason Roberts (00:21:34):

You know, it's interesting because when the, uh, implementing regulations from pension protect protection act came out in Oh seven, we had a lot of plan sponsors that began automatic enrollment. And as part of that process, a lot of those plan sponsors re-enrolled participants into their plans. And so if you think about it, let's say I'm, I'm one of those participants and I was approaching my target retirement date and I had plans for that balance. So maybe I was sitting in a cash equivalent of money market fond or a stable value fund and that was by design. And I got the notice of talking about, you know, this QDIA is coming and if I don't, you know, provide investment instruction, I'm going to be mapped into this default investment. And yes, it was a target date, but I looked at that and said, well, you know, that's a, it's for my age, it's thing, you know, when I'm going to retire and that is when I'm going to retire.

 

Jason Roberts (00:22:34):

And so I didn't take any action while the way that those regulations red and they still do. As a matter of fact, there were three types of, uh, vehicles that qualify as a QDIA. One is the age based product as the DOL calls it and that's AKA a target date. The next one was a risk based product, which is they use the example of a balanced fund. I've also seen, uh, plans designate a moderately, uh, moderate, uh, model asset allocation portfolio. But the gist there is it's, it's balanced. And then the third option was managed accounts, well managed accounts and target dates essentially. Uh, they had almost read the same except target dates said it's an investment product that has a mix of equity and fixed income exposure and it becomes more conservative over time period. The key, the managed account version of that regulation said it's a service that uses a mixture of equity and fixed income exposures and becomes more conservative over time.

 

Jason Roberts (00:23:41):

The risk-based option interestingly, was the only one, the three that sorta had baked in what all called suitability language into the regulation itself. And it says essentially plan sponsor, if you're going to select this option, which is a single investment, whether it's a single fund or a single model, it is a, you know, the notion there is that the one size fits all and what they say is that you must deem it to be quote unquote appropriate for participants of the plan as a whole. Well, my former days as a defense litigator at that one, just that, that scares me, but I think, you know, how do I defend that a default vehicle for my 55 year old worker is the, is appropriate for a 25 year old worker, 25 year olds, neuro argue, it's too conservative and that 55 could argue it's too aggressive.

 

Jason Roberts (00:24:39):

And those are, you know, solid arguments. Uh, all things being so long story short, you had, you know, if you didn't want to go down that path, you had two options. And as we've already talked about, managed accounts presupposes you're conducting due diligence on a, another service provider, a fiduciary service provider. And you're deconstructing, you know, and there was more cost. And again in that 1.0 world, it was pretty easy just to say we'll take the target date. And so that was, you know, as this was happening where you know in Oh seven leading into one bottom falls out of the market. Lo and behold, not alternative date funds were created equally. So I think I was reading 30 to 40% losses in some of these participant accounts. And again go back to the scenario where I am, you know, previously I was in a stable value or cash equivalent money market fund taking no risk.

 

Jason Roberts (00:25:36):

I might not have been keeping pace with inflation but at least I could argue I was preserving that balance because I had plans for that month. Maybe I wanted to roll it over into a guaranteed product. Maybe I just had some things that I wanted to fund the, you know, sort of, you know, personal goals and different things for, for my comfortable retirement, whatever the case is. A lot of those participants sold at the bottom. They weren't expecting, you know, any volatility, let alone a 40% decline in their account balance. At the time, there were lawsuits filed, we just didn't read a lot. A lot of outed them because they were dismissed across the boards and the reason they were dismissed as a plan sponsor, they say, you know, the question again is did you prudently select this because you're not entitled to QDIA protection if you can't show that you prudently selected in your periodically monitored well, they pointed to the regulation and said, well, this target date, yes it has a mix of equity and fixed income exposure and yes, it becomes more conservative over time.

 

Jason Roberts (00:26:38):

So based on everything you told us, the department of labor and Nerissa and Congress, yeah, we prudently selected the courts. Agreed. Those were dismissed. Now fast forward to 20, you know, after we lived through that crisis and uh, shortly thereafter the DOL and the securities exchange commission partnered to create an investor bulletin for participants and other, uh, individual investors in target date funds basically thing they're not all created equal. Here's some of the questions you should be asking and and things you should consider when deciding whether or not to opt in or opt out of a target date fund in 2013 and I realized this is a long answer, I'll come up for air here in a minute, but in 2013 the DOL published it's tips for a risk plan fiduciaries regarding target date funds and what the DOL said there is that here's eight additional data points or bullet points that you should go into your analysis.

 

Jason Roberts (00:27:34):

One of the bullet points that I think is very relevant today, while we're at all time high, you know, market market highs is you should look at withdrawal patterns, plan sponsor, and when you're thinking about selecting guide path and, and so let's say, you know, I was one of 95 participants in my plan that had its doors rolled out. I'm a role moral. My account over left the plan, so to speak, app or shortly after my retirement. And if 95% of my coworkers had been doing that same thing historically, and my plan sponsor selected a target date that was aggressively managed through retirement, then the plan sponsor needs to have a credible story to tell that why, why in the face of that data did they select that aggressively managed through which is going to have more equity exposure and therefore volatility. When they knew that 90% me and 95% of my colleagues were going to liquidate that account at that retirement date.

 

Jason Roberts (00:28:34):

So not to say that, I mean I can make a great case for growth during retirement, why we need that additional equity exposure and so forth. But one of the other bullet points in the DOL tips was essentially you've got to educate around what decisions you made to your participants. So if I make a decision to include a a managed through retirement glide path in my plan as a default and my participants are rolling out historically the majority of them are rolling out at or shortly after the target retirement date, then I need to have an aggressive information campaign to show that that was still a proven prudent decision and I need to educate participants that these are not vehicle designed to be liquid into that retirement, that they're going to have be subject to more volatility because of the additional equity exposure and the growth that we're trying to promote in those accounts through retire. So it's just like anything else with the DOL and ERISA, it's comes down to what's reasonable and prudent and the process one arrived to get, you know, to that decision in this case, whether or not to use target dates and, and then the deeper layer of analysis in terms of which target date funds should we use for our, our plan.

 

Rick Unser (00:29:47):

I guess I'll have you take on two things for me. One, the DOL tips, I mean, okay, thanks for the tip. Got it. You know, we'll, we'll, we'll get to that when we can. And then I guess secondly, as we continue to see this evolution of managed accounts, do you see this either today or in the future, having some of those same discussions around selecting a managed account provider as people today should be having around selecting target date providers? Or is it more binary of, you know, just yes or no in terms of do we make a managed account? Our QDIA if we believe managed accounts themselves are a prudent solution that we should be making available to our population?

 

Jason Roberts (00:30:37):

So I'll take the last one first if you don't mind. The, the short answer is yes, I should be looking at that as well. And in particular, I should be looking at the issue of essentially the glide path, right? There's a bypath in a managed account, just there is in a target date fund. The difference with managed account is as additional data comes into the system, that guide path can shift, that therefore is the customized aspect., So if I'm evaluating that as a plan sponsor, I want to presuppose nobody puts any additional information in that system. Let's assume this defaulted participant doesn't do anything but go along for the ride that is baked into the managed account service based upon, let's just say solely their age. And I need to understand whether that Glidepath is a fit. Just like I would in vetting a target date fund.

 

Jason Roberts (00:31:31):

Now I want to come back and make sure I didn't lose sight of that first question you asked me because I get asked this all the time. And we see plan sponsors in a couple of different capacities, but it's typically in my capacity as outside of counsel at retirement law group where I will be asked by plan sponsors, help us understand what risks we have. And just like with service providers, investment advisors, et cetera, I always try to give them a couple of different lenses through which to evaluate risks. One is the technical legal risk and the other, this is the practical risk and I think you really have to have both given you know, an ideal world. We manage the day life of the technical legal risk and we don't have to worry about practical, well the, it's practical for a reason.

 

Jason Roberts (00:32:17):

It just recognizes that planned sponsors don't have unlimited bandwidth and that their consultants aren't there on site every day. So how do we allocate that precious time that we have where we're, you know, very focused on the plan. We've got our service provider experts in the room and we're, we're making these decisions and what I tell them is that, you know, for the first time or at least since 2013 and every year that goes by in the market climbs higher and plan sponsors don't pay attention to this. I think they have technical legal risk. I know they have technical legal risk and I think they have increasing practical risk that the scenario develops is that just mentioned to you, uh, where I was a conservative investor, my participant population tended to roll out of the plan at retirement, but yet we have this unexplained aggressively managed through Glidepath target date as our default.

 

Jason Roberts (00:33:12):

So to clarify though, why is the DOL tips, why did that make that practical risk so much higher? Think about the Department of Labor. Every tip very precise when they issue guidance. And you know, it may not always be something that answers every question, but their wording is generally very intention. And so they're not going to tell you you have to land on this option or another, or they would just write a reg thing that, or they would, talk to Congress about, you know, changing the law. What they are though is the primary regulator of fiduciary conduct for retirement plan fiduciaries. And we've already talked about to get that protection, which can be bulletproof like it was in 2008 or 2009 for those plan sponsors for the investment related losses. The QDIA itself has to be demonstrated that it was prudently selected and it was monitored and then they're relieved from liability for losses. You know in those, in this case target date funds. Well prudence, we talked about this at the outset, requires that you consider relevant information or that which you should know to be relevant in order to arrive at a well-informed decision and then you must act in accordance with that decision.

 

Jason Roberts (00:34:34):

How can we say that the DOL's own guidance with respect to things, plan sponsors should be considering is anything other than something that we should know to be relevant. And so I really feel like if that plan sponsor has done nothing since, you know, initially designated their target date fund, they've never gone back and re-evaluated in light of the DOL's additional, you know, tips here that it's going to be very tough to argue that that was a proven decision. And I think they are, if they do have some practical exposure. By contrast, the other practical exposure items that are both technical and practical, occur in the service providers selection monitoring where you know, we see plan sponsors getting sued, we uh, when it comes to share class and rev share and things like that that plan sponsors need to better understand or, or particularly in the administration and reporting related duties where you have all of the, you know, technical IRS aspects, you've got DOL requirements and you have all kinds of parts, you know, from payroll to plan documents to, to everything else.

 

Jason Roberts (00:35:42):

That's where I tend to tell them they have the most practical risks. So the departure is me telling them now you have practical investment risk because it's just, it's rare that you see any lawsuits or certainly enforcement actions based upon investment performance alone. But when we talk to these plans, sponsors, a lot of times if they're not working with a professional retirement plan, sponsor consultant, they're the investment professional that they're working with feels very comfortable talking about investments. And that's where all of the conversations occur. So they're not managing these other aspects which relate to process and and some of the other things that are more likely to get plan sponsors in trouble.

 

Rick Unser (00:36:22):

All good points. And what I will do if people haven't seen the tips is just include a link on the website to some of that information from the Department of Labor. And while I'm not able to cite them by memory, one thing that I think is we, you know, think about some of the differences between target dates and managed accounts. And if you're looking at those tips and saying, okay, well a target date is this, a managed account is kind of like a target date but allows for a lot more choose your own adventure based on some data points. One thing that that I come back to and, and I and I think about is, all right, well if we're going to flip this switch and make our default investment option, a managed account, and one of the benefits of that managed account is all of this additional customization that can be delivered to a participant based on all sorts of different data points. Some maybe are fed automatically, some are are supplied by the employee. Does a plan sponsor need to add engagement level within their population as an additional data point? Or maybe is that something that would be a suggested best practice if you're going to have a managed account as your Qualified Default Investment Alternative that you kind of track what percentage of the population is engaging with that service? Or am I overthinking that?

 

Jason Roberts (00:37:54):

I think so, but I'm, I'm gonna pull it into a managed account 2.0 because I think this is where if we keep talking about 1.0 you're absolutely right, that is, and that's been one of the barriers, but if we're talking about going forward, you've got a couple of things that are, that are leaning plan sponsors are or least tilting the conversation towards managed accounts. One, for plan sponsors that are being made aware and educated around all of the things they need to do now to show that they've complied with the DOL tips. It's not insurmountable. I mean there's a process. We've actually distilled it down for some clients and do a one page supplemental investment statement. That's the documentation of your process, but then there's still a lot of investigatory work and due diligence and you know, looking at at various alternatives and then documenting the basis on which those decisions were made.

 

Jason Roberts (00:38:49):

But it's a lot more work. It was not just hey, it's a target date. It fits. Let's go on our merry way. Just one other example there in that the DOL tips that you need to also consider costumer non-proprietary alternatives, alternatives to what? Well reading between the lines and alternatives to the recordkeepers proprietary target date series. Not saying the record keeper series might not be a good fit for most plans, but again you've got to make that case and I think a lot of plans sponsors have told me is when I ask how did that target date series get in this plan? Well we were told it was going to make our recordkeeping fees cheap and that's exactly what the DOL is going here is saying compare asset management, asset management. If you find a good fit and you get record keeping fees reduced as a bonus because it is proprietary to that record keeper, great, that's a bonus.

 

Jason Roberts (00:39:39):

But it can't override the decision as to whether or not it's a prudent choice for that plan. So you've got that sort of working in the background that it's, it has really raised the bar in terms of due diligence. It's not a just a, you know, pick it up the menu and set and forget it. Like, you know, a lot of plan sponsors did when the, when the rules first came out. The other thing that is now coming to fruition is you have enhancements in technology that are making it easier to add manage account functionality to platforms. That is sort of cutting against one of the negatives that we saw earlier that I've discussed at the outset, which is cost. They're becoming more affordable, uh, just given, you know, again, just enhancements in technology.

 

Jason Roberts (00:40:31):

The other big factor I think here, it can't be understated, is what happened in even those platforms where the managed accounts were connected and they'd been there for years. The utilization, not just the participant utilization from a supplying additional data into the system, but just the uptake as you know, anybody opting in, it was very, very low, low single digits. And you asked, you know, well why is that? Well maybe part of it had to do with cost. A lot of it had to do with nobody was there from that managed account provider sitting down with a participant or a group of participants talking to them about the managed account. Right. It wasn't the investment advisor or consultant that is that they're used to seeing that serving their plan and plan sponsor in the board room and that's coming into the break room and, and helping them with education or advice or what have you. It was some third party that didn't really have a seat at the table at that employer's offices.

 

Jason Roberts (00:41:22):

So what's happened over the last probably two years in particular and we've been very blessed to have, you know, just progressive clients over the years that, that, uh, have been tapped to be some of the, uh, we'll just call them early adopters of what I'm about to say. But what's happened is those same managed account providers have now said, I wonder if we'd have better adoption if we worked with the plan advisor. And by what I mean by working with the plan advisor, essentially what's happening is those managed accounts systems and those, those companies are opening up their plumbing and they're saying, Hey, uh, you know, plan consultant or advisor, particularly those that are already serving the plan in a discretionary capacity as a 3(38) investment manager. They're making decisions around what funds should be in that menu. They may even be making decisions around managed accounts.

 

Jason Roberts (00:42:18):

We'll talk about their potential conflict there later. You can't hire yourself to perform an additional service with discretion. You're getting paid. But in any event, what's happening now, and it started with some of the bigger firms and we're starting to see it be made available now to smaller firms. But what they're saying is you make this your managed account, you tell us within reason how you want that glide-path to work. We're going to model the funds that you've designated as the core menu. And by the way, this is really your, you know, your service. So you're going to have an agreement with the plan sponsor explaining the service and standing behind it. So these. The traditional managed account providers are now serving more as a technology provider and a subcontractor to the investment advisor consultant. And what that's doing is it's, you know, obviously giving the consultant an additional revenue stream.

 

Jason Roberts (00:43:15):

And I know we'll have to unpack that in a minute. So they're motivated to bring an additional valuable service to the table. But when it comes to utilization, the whole reason we started talking about the 2.0 manage account. Now there's somebody in that break room that understands the managed account service, understands and it has access to participants to nudge them to provide additional data. Then they can get to a conversation that don't have as much to do with allocation, like, you know, contribution rates and, and things like that with participants that in a clunkier more manual world they weren't able to do. So in those plans, what we're expecting to see, we don't have enough data yet because this is all pretty new. Uh, but we expect to see far greater adoption of participants. Maybe even QDIA in some cases have no reason. It couldn't be a QDIA and far more engagement at the individual participant level pushing information about their own personal circumstances into the managed account solution.

 

Rick Unser (00:44:21):

Before we get to the fee stuff for a second. Let me come back to what you said. You've got an advisor who, if I heard you right, basically can take the plumbing or take kind of the architecture of what's driving some of these managed accounts and then either customize or put their own preferences I don't know what the right word might be there to say, okay, this box is wonderful, but I'm going to tweak it slightly and make it either more aligned with mine or my firm's beliefs or combined with what the plan sponsor has told me about their participant base and instead of doing exactly what ABC firm does for all of their other clients and hired them to do managed accounts, we're gonna take the plumbing, but we're going to refine it in a way that is more specific to us or specific to the plan sponsor and their employee base. And if I got that right so far?

 

Jason Roberts (00:45:27):

You do. I think one way to think about it is a managed account system, let's just call it as different highways, right? It has the highway of information coming from the record keeper to the managed account provider. That's supplying at a minimum information about that participant's age. You have another information highway, if you will, that is going from the participant to the managed account provider. It's, you know, all of those supplemental data points that I've been referring to, you know, things that that employer is never going to know and be able to put in the system on my behalf. Then you have a highway coming back from the managed account provider to the record keeping platform that is actually effectuating the transactions in those individual participant accounts. Well that's the infrastructure that a traditional consultant or advisor firm, you know, they may be able to, some of them may have been able to build it and maintain it, but having to knock on the door and ask, you know, record-keeper can we open up the system and get in there and, and you know, have our own interfaces and so forth that conversation was pretty much DOA.

 

Jason Roberts (00:46:32):

So now that the recordkeepers get to continue to work with that trusted partner that has the plumbing that built the highways and now the advisor comes in. And if you think about some of the other negatives in that 1.0 version was the additional due diligence, well you have at least if it's your incumbent investment advisor consultant, you presumably already conducted due diligence necessary to show you prudently hired them and periodically monitoring their performance and their, you know, disciplinary history and other things. It would be supportive of a prudent decision to not, you know, to continue to keep them high, not to fire them in other words. And so part of that due diligence barrier is brick, you know, breaks down. The other thing that I think you mentioned I just wanted to highlight is you're absolutely right.

 

Jason Roberts (00:47:22):

Within reason I get to control the philosophy of the managed counselor after all, it's money and I'm just renting somebody's plumbing to get the trade signals and the data and so and, but I'm standing behind it at the end of the day because it's my contract with the plan sponsor. And I may also have a contract with a participant. Again, depending upon how I'm getting paid, but I am who's in a better position to understand, you know, the ins and outs of the plans, the demographics, the behaviors, some of those things that we've talked about in the target date, considerations that are relevant here. You know, do we want to have it, uh, aggressively allocating into equities at retirement and beyond or do we want it to reach its final, you know, a equity allocation at the target retirement date. So those are things that presumably investment advisor consultant that's had been, you know, in the trenches working with that plan and it's participant, they're going to know they, they would I think be well served to bring you the proposal with those things spelled out, you know, not just here's a proposal, sign this, you know, to hire me for this additional service, here's how much it costs.

 

Jason Roberts (00:48:31):

But you know, I always tell those, those firms to ask and answer the questions that your clients should be asking of you and put that in writing. And, and that will help, you know, streamline the due diligence process. They can't take to the bank. They need to ask some questions, they need to verify what you've, you know, put down there. But if I can come to a plan sponsor and say, given everything I know about this plan, given this new capability we have, we're going to turn the dials so that the account is managing your participant population this way. Uh, and as they supply additional data points, they're going to have, you know, these additional adjustments made to that, that account. So it is really a, it, I can't underscore how much of a departure it is from 1.0 and how well positioned I think it is.

 

Jason Roberts (00:49:15):

The 2.0 can be to compete for QDIA shelf space, if you will, with plan sponsors that, that really, um, you know, buy into the story and, and, and know that their advice. Think about financial wellness. Right? That's been really the kind of the, the flavor does your for now probably five years and a lot of plans, sponsors have adopted a lot of advisors or are helping distribute and get that information to plan sponsors so participants can get a more holistic experience in the break room. Well this is, you know, call it the, the 2.0 of, of financial wellness. It's now taking that information that participants are, you know, using in the wellness and that interface and repurposing it to make that managed account glide-path more customized based upon the needs of that individual.

 

Rick Unser (00:50:08):

And, and just to, I guess maybe put a finer point on it in terms of what may be possible in this 2.0 model where you know, you do have sort of that advisor customization, and I'm making this up, but let's just say for a 25 year old using that one Oh model where you've got a managed account provider, just they've got something that that's out there in all plans that have engaged with their managed managed account service. You know, they would get this. So let, let's say theoretically that someone who's 25 years old could and one of their scenarios have no exposure to stocks or only 10% of their account could be exposed to stocks because of some rule or circumstance. An advisor could come in and say, all right, well we're going to modify this and just we're going to turn off any allocations and I'm again making this up under 50% of in stocks for someone who's 25 years old. That's the type of customization they could have or, or am I missing the point?

 

Jason Roberts (00:51:14):

Yeah, I think too, to a degree, again, it varies based upon, you know, which platform provider you're working with, which managed account a partner you're working with. But I think that the, just, except I guess the lawyer in me wants to take issue with one of the first things you said. If it was a managed account and that person had zero exposure to stock, it would not be eligible to be a QDIA because they have to have at least, you know, a mix of equity and fixed income exposure. So it would need to be, you know, 99 fixed 1% equity if you know that. Most conservative. But I don't, we don't ever get it. Well, I don't see advisors practically getting out there, but yes, you could engineer some safeguards. Generally, I think you're heavily into equities until about 30 35 years, you know, so like 98% equity or 90 to 98 uh, then depending upon where that, you know, what is that allocation that the tipping point, that's kind of the two versus through, right. That we were talking about in target dates could be, you know, 40%, it could be 15, 60, whatever. But then lastly, where does it land? You know, how much equity exposure do you have as you're moving through retirement and beyond, so to speak? Yeah. The, you've got the just, that's it. That's the type of customization that is available that would allow an advisor to bring to the table something that is uniquely configured based upon the, the, what they know about that particular point.

 

Rick Unser (00:52:48):

Got it. And then transitioning into some of the points you brought up a minute ago about, okay, well you have an advisor that's working in a discretionary capacity as an ERISA 3(38), and maybe just explain that real quickly and then now they're going to be engaged to also run this managed account offering. What should an employer be thinking about as they head down that path and how should they do that or, or is there a way to do that where they can avoid some potential trip wires or other issues that that could come back to bite them down the road?

 

Jason Roberts (00:53:29):

Yeah, great question. So what, what the advisor is going to do, you're, I don't know, a single advisor that's made any, you know, made an investment like what it takes to get one of these things off the ground. It's not just a plug and play there, you know, a lot of decisions that need to be made, contracts that need to be negotiated, so forth. And so I don't know anybody who's looking to give that away as just a pure value add. It's a bonafide service for value and they should be compensated and should expect to be compensated. The question becomes, you know, what does that process look like and then what are the, what is that arrangement? How is that arrangement structure? The process needs to be that just like anything in [inaudible] under that requirement, I'm proposing an additional service. Even if I have discretion over the plan's core menu while we go at the DOL called designated investment alternatives, I don't have discretion to add a service plan sponsor needs to independently authorize me based upon all the due diligence and all the things we were talking about earlier.

 

Jason Roberts (00:54:28):

So I'm presumably bring them an addendum to my, the plan agreement we have in place. Maybe I'm asking them to sign a new agreement that includes the managed account service, but that's the first step the advisor goes to makes the case. Again, they'd probably be well served by bringing along some additional materials about, you know, the other subcontractors, the people maintaining the plumbing, so to speak. You know, yours. Here's how this works. Here's all of the different layers of, of you know, things that you might want to know, plan, sponsor and here's how we're proposing to charge. Uh, and now it's really the plan sponsor looking at the managed account from a due diligence perspective that service, but they're not having to re vet the investment advisor firm, you know, in the restroom investment advisor, which is what most of these firms are. Uh, so I'll just stop explaining that and you know, a couple of different ways.

 

Jason Roberts (00:55:18):

We'll just call them RIA. They don't have to re the RAA, they're rebuilding the RAA only in that to the extent it's offering an additional service. So they need to unpack that service. They need to determine its, uh, offered, uh, pursuant to reasonable terms and that it is reasonable the compensation received by the advisors reasonable in light of the value of the services they're providing. Step one. Right. You've got to get engaged. Yeah. You have to be legally engaged pursuant to plan sponsor conducting the due diligence in you. Otherwise satisfying for a week be too. Then the question becomes how do we get paid? Right. And that would be part of the, you know, getting engaged plan sponsor needs to know, but I'm just separating the two just for illustrate your purpose. So how would that advisor propose and get paid? Well the benevolent plan sponsor can just write a check out a corporate asset that is 100% legal. It's encouraged, I don't know, you know a lot of small businesses that are going to do that as well.

 

Jason Roberts (00:56:24):

I think that's also a big departure from potentially, at least from 1.0 where I think in in the 1.0 version of managed accounts. It's mostly been a cost that has been born by the, the those who utilize the managed account service versus something that plan sponsors paid. Absolutely. Because if you think about it that those are traditionally opt ins, right? They were showing up on the platforms before there was such a thing as Cuba. So they were set up as opt in if you wanted to use that service. The participant, individual participants signed an agreement, maybe digital, but they're entering into an agreement with the managed care provider. And the 1.0 version authorizing the services to be provided in the feeds to be deducted from their account. So again, because that remote managed account provider and that 1.0 scenario, they didn't have a seat at the table, they didn't have, you know, I guess in some cases they could have had a contract with the plan sponsor. Um, but they're not, you know, in their pressing the flesh so to speak, making a case wide plan sponsor needs to find a plan level agreement and you know, paying the fees out of corporate assets or, or what have you. So it's just a different model is much more remote, lower touch model. And with lower touch comes less utilization.

 

Rick Unser (00:57:42):

Didn't mean to interrupt you there. But that was just an interesting, as you were describing, I'm like wow, that is completely different than the way the world works or at least predominantly works right now.

 

Jason Roberts (00:57:52):

Yeah. And, and I would still say that even though now we have the ability to the RIA presents or the investment advisor representative present its RIA contract to the plan sponsor and the plan sponsor can decide how, you know, if they give them options, which is typically the case is how it's worked, at least with our clients that have come out of this. We've had a handful that are out, up and running and we have another, you know, half a dozen or something that are in the process of getting it all negotiated. But what they're doing is giving options. Some of them give all three options on them, give to some, have even come up with options that aren't necessarily included here. But, uh, the second out of the three at least that, that are more common. The second one is there's a flat or asset based fee charged to the plan as a whole.

 

Jason Roberts (00:58:39):

So if you think about participant investment advice, I can tell you the plans that we've worked with where participant advice was baked in. It's a necessary, you know, it's been determined it's a necessary expense that a plan sponsor could reasonably allocate to participants. Can't do it in a discriminatory manner, right? If it was just the highly compensated executives using the service and you could have some, you know, discrimination problems there, but you can, you know, spread that cost across all participant accounts. And same is true here. So the, what happens happened in the participant advice market is we saw, you know, significant adoption, even though it was opt in, opt in in a sense that you're paying for it, you might as well use it. And I think that was sort of the mentality is when participants realize this is a feature being offered by my plan and being charged for it, I'm going to use it.