Broadcast Retirement Network’s Jeffrey Snyder discusses managed account marketing versus research with Ronald Smith, FSA.
Jeffrey Snyder, Broadcast Retirement Network
Well, Ron, it is so great to see you. Thanks for joining us this morning.
Ronald Smith, FSA, Retired Retirement Industry Member
Good morning, Jeff, and it’s a pleasure to be here.
Jeffrey Snyder, Broadcast Retirement Network
Yeah, and I’m really excited to talk about this. We have talked on the network about managed accounts. You’ve done some deep diving, deep dive on managed accounts, done a lot of research.
What are some of the key takeaways from your research?
Ronald Smith, FSA, Retired Retirement Industry Member
Well, managed accounts is a large and growing business segment of all DC record keepers. People have different and strong opinions on both sides. People like the concept of personalization, improved retirement outcomes, and the skeptics talk about the cost of the program and whether there are more cost-effective ways to accomplish basically the same goals.
Jeffrey Snyder, Broadcast Retirement Network
I know personalization, sorry to interrupt you, personalization is such a big trend in our business these days and everyone’s looking for an opportunity to personalize what the end user, that participant receives. Sorry to interrupt, go ahead and continue your thought.
Ronald Smith, FSA, Retired Retirement Industry Member
Yeah, I think to a large degree, the DC industry is a commodity. And so wherever the business can show value and differentiation, they’re looking to do that. And personalization is one of those topics getting a lot of attention today.
In some of my prior corporate lives, I’ve often been asked to research pitch books or new product innovations with a skeptical eye. Even when you take into account managed account fees and Morningstar assumed 40 basis points in their research, which is pretty reasonable assumption. Even when you take fees into account, you are provided with favorable outcomes really across all ages, all incomes, all types of DC planned designs.
And whether you are a target date fund investor or what they call a do-it-yourself investor. So it sounded too good to be true and that’s when I started looking into things. And whenever I read someone else’s research, I’m always focused for statements that raise questions.
So I started digging in and I said, I’d really like to know just how big a role increased contributions play. Is it 51% or is it 90%? And they didn’t specify that.
So that makes me a little curious. And then the second part is improved asset allocations with not a whole lot of improvement if you are a target date investor, but more improvement if you’re a do-it-yourself investor across all age segments, at least 25% of the population are 0% invested in equities, which is not a very favorable comment on the DC industry. If that many participants are that conservatively invested for what should be a long-term savings goal.
Jeffrey Snyder, Broadcast Retirement Network
We’ve been talking, not to interrupt you, but we’ve been talking about it for a long time, people investing in money markets, stable value, maybe they’re investing in a bond fund. When you’re 30 years old, as you know, and probably the audience knows, you want to take advantage of the growth in markets. I mean, compared to what’s going on today in the Dow and the S&P 500, it just lights out.
So that makes a lot of sense. And let me just ask you, Ron, I mean, look, when you read research, you got to read it with an eye. And I’m not saying there’s not a, I don’t think people are looking to mislead.
I think that at the end of the day, they’re looking to create research that supports their thesis. We see this in lots of industry related research, right? I mean, people try to prove, kind of work back and they use the research almost as quasi marketing.
Ronald Smith, FSA, Retired Retirement Industry Member
Yes. And anyone, I remember as a kid, he had flyer sneakers helped you jump fences until you actually try to jump a fence, then it was not a favorable outcome. So people have been spinning and I’m taking credit for the term spin search, where research and marketing kind of overlap with one another.
To give you an example, Morningstar says that the biggest benefits go to younger, newly hired people. And I said to myself, gee, if I was trying to pitch more managed accounts as a QDIA or as a hybrid that maybe kicks in at 50, I would sure like to be telling people that everyone benefits under all plan designs.
Jeffrey Snyder, Broadcast Retirement Network
But let me ask you, what are some of the takeaways? Say I’m the fiduciary, say I’m the investment advisor on the plan. I’m the fiduciary of the plan.
I’m on the committee. What are some of the key takeaways here? Do I need to do more due diligence?
Because a lot of times managed accounts are just kind of a bolt on. They just say, during the RFP process, during the selection process, the advisor sometimes doesn’t even look at it. So is the takeaway here, do a lot more due diligence, whether it’s Morningstar or Financial Engines, one or the other litany of products that are out there?
Ronald Smith, FSA, Retired Retirement Industry Member
Yeah, I think the question in my mind is the squeeze worth the juice. And there is a Prudential study that has talked about plan sponsor reluctance to implement managed account until the fees get below 10 basis points. That’s the example that people use.
And so I think plan sponsors intuitively know that it is an expensive service for what it gives. What it gives is promoting increased savings. And record keepers have been promoting increased savings for decades for free.
So you don’t have to pay 40 basis points a year for what should be a nudge early on in someone’s career, maybe periodic nudges. The other thing is more diversified portfolios. If you’re in a target date fund, you are in a pretty well diversified portfolio.
It’s really the do-it-yourselfers and particularly the very conservatively invested participant who would greatly benefit from diversity. Record keepers have been doing that through the education process for decades as well. The fact that so many people are 0% invested in equity shows that they’re not doing a great job.
But I think there is an ROI for managed accounts. And it’s not been publicized because managed accounts are sold as kind of a squishy benefit. Participants, they’re going to get better retirement outcomes.
They’re going to feel better. They’re going to feel more confident. But I’m an actuary.
I’m a numbers guy. And I’m looking for the numbers. So where I would like to see things go, and I think consultants certainly have this capability, is to make a measure of the ROI of putting in managed accounts.
Compare it to the ROI of an expanded education program, a personalized education program for either low savers or poorly diversified people. Stack that up against what managed accounts offers.
Jeffrey Snyder, Broadcast Retirement Network
Well, Ron, it sounds to me like a lot more due diligence is needed. You’re going to continue research. Hopefully, you’ll be able to come back on the network and we’ll talk more about it.
But I think the takeaway here is that more due diligence may be needed. Ron, we’re going to have to leave it there. Great to see you as always.
Thanks for joining us. And we look forward to having you back on the program again very soon, sir.
Ronald Smith, FSA, Retired Retirement Industry Member
Thanks so much, Jeff, for having me. And hope your readers, your listeners got some good benefit out of this.