The Institutional Pricing Advantage
Mega defined contribution plans operate with pricing leverage that is often unavailable to smaller sponsors. According to research from Russell Investments, the sheer size of these platforms helps them negotiate lower fees. For the largest plans, this has consistently led to managed account rates of under 20 basis points (0.20%), and in some cases, can be had for as low as 10 or even less than 10 basis points.
This dramatic fee compression is a direct result of the powerful combination of technological innovation and sheer scale. While industry-standard managed account fees typically range from 40 to 60 basis points, mega plans consistently access pricing that is on par with, or even below, the cost of many target-date funds available to smaller plans.
The Negotiating Power of Scale
The substantial assets of mega plans create a strong negotiating position with managed account providers. This is a consistent trend across the industry. For example, the Encore Fiduciary Large-Plan Recordkeeping Benchmark Study shows that these sponsors have already driven down core recordkeeping costs to just $35 per participant annually for plans over $5 billion. This same negotiating power extends to managed account services. Providers compete aggressively for access to large asset pools, leading to fees approaching 15-20 basis points or lower, a reduction of more than 50% from standard pricing.
Fee Transparency and Its Impact
Sophisticated fee structures used by mega plans create additional opportunities for managed account cost reduction. The Encore Fiduciary study of over 2,500 large plans notes that the vast majority of plans with over $500 million in assets use a per-participant recordkeeping fee with revenue sharing eliminated or minimal, and most of that revenue is credited back to the plan or participants. This model of fee transparency is also applied to managed account negotiations. This allows providers to offer direct fee arrangements that further reduce costs for participants while maintaining high service levels.
The Flaw in a One-Size-Fits-All Approach
The primary reason target-date funds have provided only an "imperfect solution" is their inherent simplicity. Consider this: if a target-date fund were an investment advisor, it would only be allowed to ask one single question—your age. Would anyone hire an advisor who used such a limited data set to manage their life savings? That's essentially the approach of a target-date fund. It assumes that everyone born in the same year has an identical financial situation, risk tolerance, and retirement goal.
This generalized approach is particularly inadequate for those within 10-15 years of retirement or who are in the post-retirement, "decumulation" phase. At this critical stage, factors beyond age become paramount: a spouse's income, external assets like real estate or a pension, specific health-related costs, and an individual's actual risk tolerance. A target-date fund cannot account for these nuances, which can lead to a suboptimal and potentially riskier outcome. Managed accounts, in contrast, provide a personalized strategy that considers the complete financial picture, offering a more precise and tailored solution that truly fits the participant's needs.
The Cost-Benefit Equation
When institutional managed account fees are secured at sub 0.20%, the traditional cost objections to managed accounts are largely addressed. This significant cost reduction fundamentally alters the value proposition. According to research from Alight Solutions, managed account users have a documented 1.15% annual return premium over target-date fund participants. For a participant with $250,000 in assets, that premium translates to a potential $2,875 annually—a return that can be meaningfully higher than the incremental cost of the managed account service in a mega plan environment.
While rolling retirement account assets into an IRA and working with a professional advisor is one potential solution, these advisors may charge 1% or more annually for their services. As a result, a managed account provider that can offer a similar service at scale for a fraction of that cost presents a meaningful value to plan participants.
The Competitive Advantage
The opportunity to provide institutional-quality managed account services at a fraction of the traditional cost gives mega plan sponsors a powerful competitive advantage in the ongoing competition for talent. Offering sophisticated investment management and financial planning services at an accessible price point is a key differentiator that benefits employees across all account balance levels.
The Role of a Skilled DC Advisor
For a plan sponsor, the abundance of managed account providers and the nuances of their offerings can be overwhelming. This is where a skilled defined contribution plan advisor becomes invaluable. The right advisor goes far beyond simply recommending a provider; they act as a strategic partner to the investment committee.
A seasoned advisor brings deep market knowledge to the table, helping to vet providers on criteria that extend far beyond price alone, including their investment methodology, technology platforms, service model, and ability to scale. They are also uniquely positioned to negotiate with providers on your behalf, using their industry relationships and understanding of market benchmarks to secure the most favorable terms for your participants. This expertise ensures that the managed account solution you choose is not only cost-effective but is also a perfect fit for your plan's specific demographics and goals, providing an added layer of fiduciary support and risk management for the committee.
Why This Matters to Plan Sponsors
For company executives, senior human resources staff, and other members of a defined contribution plan's investment committee, the decision to offer a managed account service is more than just about investments. It is a strategic decision that directly impacts their core responsibilities.
First and foremost, it fulfills their fiduciary duty. By leveraging their scale to secure institutional-level pricing, they are ensuring that participants have access to a sophisticated, personalized service at a demonstrably reasonable cost, thereby mitigating potential legal and financial risks.
Second, it directly addresses the challenge of improving participant outcomes. Managed accounts increase participant engagement, improve asset allocation, and help drive better retirement readiness scores. This moves beyond simply offering a plan and moves toward actively helping employees achieve their retirement goals. For members of the investment committee—including company executives, senior human resources staff, and others—the ability to improve their employees' lives and their standard of living in retirement is the ultimate reward.
Finally, a truly competitive retirement plan is a powerful tool for talent attraction and retention. In a competitive labor market, a plan that goes beyond the basics to offer high-quality, low-cost advice demonstrates a genuine commitment to employee well-being, enhancing the company's value proposition as an employer of choice.
For plan sponsors managing substantial assets, the prudent approach is to leverage their considerable bargaining power to secure this transformational pricing and deliver a superior retirement plan benefit to their employees. This is not just about saving money; it's about providing a more effective and equitable path to retirement readiness for all participants.
For more information and personalized guidance, please feel free to reach out to Vistamark Investments LLC. You can contact us at
312-895-3001, visit our website at
www.vistamarkllc.com, or send us an email to
info@vistamarkllc.com.
