By Jenny Kiffmeyer, J.D – The Retirement Learning Center
Managed Account or Advisor Managed Account—What is the Difference?
ERISA consultants at the Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings plans, including nonqualified plans. We bring Case of the Week to you to highlight the most relevant topics affecting your business.
A recent call with a financial advisor from Maryland involved a discuss around managed accounts in 401(k) plans. The advisor asked: “Are there differences between a ‘managed account’ and an ‘advisor managed account’ in a 401(k) plan and, if so, what are they?”
Highlights of Discussion
Yes, there are differences between a basic managed account and the more holistic advisor managed account in a 401(k) plan. Let me start by reminding readers that both are an investment service that a plan may, but is not required to, offer.
Under the DOL’s definition of qualified default investment alternative (QDIA) for a retirement plan, a managed account is defined as an investment management service directed by an ERISA 3(38) investment manager, the plan trustee or the plan sponsor (i.e., an investment fiduciary).The investment fiduciary, using the investment alternatives available under the plan through the recordkeeping platform and following generally accepted investment theories, must allocate the participant’s plan assets to achieve varying degrees of long-term appreciation and capital preservation through a mix of equity and fixed income exposures based on the participant’s age, target retirement or life expectancy. The process could be as simple as having a participant complete a risk tolerance questionnaire that points to one of a handful of preset investment models.
Managed accounts must be diversified to minimize the risk of large losses and must change their asset allocations and associated risk levels for an individual account over time with the objective of becoming more conservative (i.e., decreasing risk of losses) with increasing age. Asset allocation decisions for managed accounts are not required to consider risk tolerances, investments or other preferences of an individual participant.
In contrast, think of an advisor managed account as a turbo-charged managed account, with more bells and whistles. Not only does the advisor managed account consider a participant’s years until retirement, but could consider many additional factors, including such items as a participant’s balance, savings rate, spousal assets, other savings accounts and pensions or other retirement plans. Advisor managed accounts could also consider life changes such as pay raises and changes in marital status, and provide recommendations and guidance on an optimal savings rate, retirement age, and withdrawal strategy to better prepare participants to achieve their retirement income goals. An advisor managed account will often utilize more sophisticated technology (beyond a questionnaire) to achieve its outcome. Also, the selected investments, rather than being platform driven, are handpicked by the advisor. Of course, with more personalization and sophistication, advisor managed account often come with higher fees than a simple managed account.
A managed account is an investment service that some defined contribution retirement plans offer their participants. There are distinct differences between a standard managed account and an advisor managed account. Knowing the differences between the service offerings and evaluating the associated fees relative to the services provided are important aspects of the managed account decision-making process.
 DOL Reg. 2550.404c-5(e)(4)(iii)