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Are managed accounts poised to make inroads into small and midsized 401(k) plans?

Rob Foregger, co-founder of NextCapital, a provider of open architecture digital advice platforms, concedes that adoption of tailored management advice within retirement plans has been slow to date. But that will change in the very foreseeable future, he said.

"We think the inertia in the marketplace that's slowed wider adoption of managed accounts is breaking," said Foregger. "We're seeing a different tone where people are realizing 401(k)s are not just about portfolio allocation. There's definitely been a learning curve. But I think that's breaking and we are moving towards an inflection point."

This week, Ascensus announced a partnership with NextCapital and Russell Investments to offer managed accounts through its recordkeeping platforms, which serve more than 98,000 retirement plans.

Via the agreement, Russell Investments will offer 3(38) fiduciary stewardship through NextCapital's technology. Ultimately, advisors will be able to add their own management strategies.

"Some advisory firms will want to have the choice to add their own flavor of advice," explained Foregger. "We're building out our advice platform to allow advisors to choose from a number of different configurations and fiduciary roles."

A larger industry shift from a product -manufacturing to an advice-manufacturing mindset, driven by what Foregger and others say is a growing interest among plan sponsors to tailor advice beyond the age-dependent strategies of target-date funds, is setting the table for wider adoption of managed accounts.

"What is financial wellness? It's planning—mass market financial planning," said Foregger. "Our platform provides holistic, institutional-grade retirement planning and the management of that plan. That is the heart of financial wellness. It's understanding that we need to move beyond the target-date fund."

Ascensus specializes in plans with under $25 million in assets. Managed account offerings, and more importantly, utilization, have been slack in that space.

According to data from Vanguard, only 27 percent of plans with $20 million or less offered a managed account or model portfolio option in 2018, up just 2 percent from 2014. Only 2 percent of participants tapped the option last year, which was actually down from 3 percent in 2014.

Meantime, utilization of TDFs has surged—97 percent of small plans serviced by Vanguard use TDFs as their default investment, with more than half of contributions in 2018 going into the funds.

But the mounting imperative of financial wellness, and the wider industry push to deliver personalized solutions to the garden-variety 401(k) participant, will move the needle, says Foregger, who expects managed account adoption to grow materially in the next two to three years.

"If you believe in the concept of financial wellness, and improving participant outcomes, then you have to move beyond the TDF to get there," thinks Foregger. "TDFs were a great invention 20 years ago, but the technology now exists to provide more holistic advice."

Industry analysts have cited cost as a primary barrier to wider managed account adoption. The question has been if improved outcomes in managed accounts are significant enough to justify their expense.

Vanguard's research shows most participants are actualizing real value from their managed accounts. Seven in 10 increased their projected 10-year retirement wealth by an average of 23 percent, net of fees. And half made an active decision to increase savings rates. Managed accounts also dramatically reduced risky over-concentrations in company stock.

"Cost clearly matters," said Foregger. "Being able to deliver a competitive cost solution to our commercial partners is a critical part of our value proposition. However, it's important to understand there is a significant value chain to managed accounts that goes beyond a straight cost comparison to a TDF."

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