NEPC’s Defined Contribution Team was featured in an article by PlanAdviser to discuss their latest white paper, The Real ROI: Analyzing Savings in Managed Accounts. View excerpts below or the full article on PlanAdviser’s site here.
Consultancy NEPC’s defined contribution team argued in a white paper released Monday that the return on investment from one-time savings advice for early to mid-career participants in a managed account will not offset the ongoing fees. Instead, the firm advocates for plan sponsors to consider automatic escalation as a way to boost savings outcomes for participants.
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The firm undertook the paper, in part, as it works with plan sponsor clients who are at times “getting pushed to add this feature,” says Mikaylee O’Connor, principal, head of defined contribution solutions at NEPC.
“What we’ve seen is that plan sponsors have over time added this service without necessarily going through the full due diligence process,” she says. “As part of our fiduciary duty in working with clients, we’ve spent time over the last number of years looking into managed accounts and really trying to understand the value add.”
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O’Connor agrees that plan sponsors often want to offer more personalized solutions to participants. But she urged them to think carefully about how best to personalize.
“I think for some who are approaching retirement who have multiple pools of money and want to think about their overall financial picture, they may be a good candidate for some sort of personalized service,” she said. “But for the vast majority of people, I just don’t think that is going to happen; and we see that with managed accounts, people are not engaging with the service as they should be.”
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“The reason for the negative ROI is that the managed account fee was based on the participant’s DC assets,” NEPC’s team writes. “As the participant’s assets grew faster than their salary, the incremental year-over-year rise in fees was greater than the incremental year-over-year increase in the participant’s salary, and therefore savings. This was especially true for participants younger than age 40 whose managed account investment allocation would have high exposure to equities, similar to a target-date fund.”
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O’Connor went on to say that, in such a model, a managed account could offer a more a la carte service, in which a participant could opt-in for additional services.
“It can be on the participant to say I’m willing to pay something additional, which is a much better model than having everyone pay the higher fee,” she says.
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“A plan sponsor could help almost their entire population by increasing their savings rates for free by just implementing auto-escalation,” O’Connor says. “You’re really putting people on a good path without them paying for it.”
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