The Growth of Workplace Managed Accounts

August 2013 The Growth of Workplace Managed Accounts An Effective Solution for Plan Sponsors and Participants Despite plan sponsors best efforts to line up appropriate investments, educate workers about their choices, and encourage savings, in general employees are simply not setting aside enough for retirement in their workplace plans. And in many cases, those who do save are making poor investment decisions and/or assuming inappropriate amounts of risk. It s no wonder that only 15% of plan sponsors believe their employees will be prepared for retirement. 1 But there is a solution that gives employers a way to address this dilemma: workplace managed accounts. Unlike other 401(k) and 403(b) investment choices, managed accounts provide a model portfolio that helps participants stay on track toward retirement. In fact, recent industry figures show that the number of plan sponsors offering managed accounts grew by more than 30% from 2008 to 2012. 2 Fidelity Investments has seen equally dramatic growth in managed accounts for the defined contribution (DC) plans they recordkeep. From 2011 to 2012, the number of plan sponsors on our platforms with managed accounts grew by 24%. And the number of participants choosing them was up 57%. Nearly a quarter of Fidelity recordkept clients now offer managed accounts. 3

Three factors driving the managed account choice What s behind this remarkable growth? We believe it comes from the powerful convergence of three factors: 1 2 3 Ongoing influence that legislation and regulation both have on plan investment choices that offer advice Increased plan sponsor focus on options that encourage participant retirement readiness and help manage fiduciary risk A shift in participant behavior as employees look for more assistance in managing their 401(k) investments given current complex, volatile markets This paper examines each of these factors and how they are driving the rapid adoption of managed account solutions by both plan sponsors and participants today. plan regulations: The DOL s push for advice The passage of the Pension Protection Act of 2006 (PPA) reinforced the importance of asset allocation and advicebased solutions. The PPA was driven by the Department of Labor s (DOL s) belief that participants were making poor investment decisions, despite the wealth of information, education, and tools available to them. According to DOL estimates, financial losses (and lost earnings) for participants who did not use any kind of advice (either online or advisor based) amounted to more than $114 billion in 2010. 4 The DOL believes that adding advice-based options will improve investment results by addressing: Ill-timed buy-and-sell decisions Excessive (and costly) trading Inadequate trading Failure to rebalance Overconcentration in a single investment or asset class As plan sponsors look to expand their advice offerings in line with DOL guidance, they are increasingly looking at workplace managed accounts as an effective solution that has the potential to improve participant outcomes and complement their overall plan design. 2

What are managed accounts? Discretionary, or managed accounts are generally professionally managed portfolios that offer exposure to stocks, bonds, and other asset classes based on an individual s unique circumstances and are derived from a comprehensive interaction that gathers and assesses data about a participant s risk tolerance, time horizon, and financial situation. The account is managed by a professional investment team that selects an appropriate mix of investments and provides ongoing management and monitoring. The key benefit of managed accounts is that participants have access to a model portfolio derived from experienced professional portfolio managers who consider a wide range of factors as they manage participants accounts. These professional managers conduct the exhaustive research, make the day-to-day decisions, and do the regular adjusting and rebalancing required to keep each managed account on track toward its goals, when participants don t have the skill, will, or time to do it on their own. Plan sponsor priorities: Increasing participant readiness and managing fiduciary risk In today s difficult business environment, where employers are dealing with a multitude of new challenges, many are feeling overwhelmed by the additional demands that benefit plans make on their time and resources. Realizing that competitive benefits help them recruit and retain the best employees, plan sponsors increasingly view managed accounts as effective solutions because they help employers accomplish a number of important objectives, including improving participant retirement readiness and managing their fiduciary responsibility. Improving retirement readiness As defined benefit (DB) plans disappear from the workplace and employees become increasingly responsible for funding their own retirement, plan sponsors must offer investment options that encourage savings and appeal to a broad cross-section of employees with different needs, financial situations, and tolerance for risk. For sponsors who already offer a core fund lineup and target date funds plus online planning and guidance tools to support them managed accounts can complete the menu of investment options to help address a broad employee base with diverse needs that is looking for professionally managed solutions. 3

Participants have different needs and require diverse options. core fund lineup AND tools TARGET DATE funds * pas-w managed accounts For participants actively engaged in managing their own retirement accounts For participants who want the ease of an asset allocation solution based on estimated retirement age For participants who want active, ongoing professional management based on their age, risk profile, and overall financial situation Managing fiduciary risk Adding a managed account option can also help plan sponsors meet their fiduciary obligations and reduce the legal and compliance risks associated with employees who aren t allocated properly or don t understand their investment choices. Fidelity s own analysis has found that 56% of workplace retirement savers may not be appropriately allocated, 5 and approximately 88% don t rebalance their investments. 6 The managed accounts investment team is a discretionary investment manager, making all investment decisions and accepting full fiduciary responsibility under ERISA 3(38) for the ongoing management of participants managed accounts, subject to a plan s investment lineup. I m just not confident in my investing abilities. I guess at what I should do based on office chitchat. Quote from participant in our Participant Loyalty Survey 7 4 * Target date funds are designed for investors expecting to retire around the year indicated in each fund s name. The funds are managed to gradually become more conservative over time as they approach the target date. The investment risk of each target date fund changes over time as the fund s asset allocation changes. The funds are subject to the volatility of the financial markets, including that of equity and fixed income investments in the U.S. and abroad, and may be subject to risks associated with investing in high-yield, small-cap, and foreign securities. Principal invested is not guaranteed at any time, including at or after the target dates.

So many of the investment options seem the same; I have no idea what to invest in. Quote from participant in our Participant Loyalty Survey 7 A changed plan participant mindset: Looking for help and easy access to more customization Fidelity s experience with more than 20,000 corporate DC plans and 12 million participants across the United States provides us with a unique opportunity to gain insight into the behaviors, preferences, and needs of a broad range of Americans who are investing for retirement through their workplace plans. Most participants want and need help with their decisions One of the things we have learned is that in the wake of the tech bubble of 2000 and the financial crisis of 2008, many employees today are having difficulty managing their retirement assets with confidence. Our most recent Participant Loyalty Survey told us that only 14% of workers are very confident that they will have enough to live comfortably in retirement. 8 And 28% of workers are not at all confident about retirement, an increase 84% from 23% in 2012. 9 Clearly, individual retirement investors want more assistance with their decisions. A study of U.S. investors from Forrester Research confirmed that 84% of U.S. investors want help managing their investments. 10 of u.s. investors want help managing their assets 10 They also may need some extra help feeling comfortable about investing in stocks again which is critically important for the potential long-term growth of their savings. According to a recent study from Fidelity, investors typical reaction to market volatility in the past was to reduce equity exposure following downturns and increase it when the markets picked up. But this pattern appears to have broken down in recent years. Since March 2009, when stocks bottomed, investors have shunned investing in equities despite a 150% advance for the major averages. 11 5

An increasing need for customization In addition to considering factors such as time horizon, risk tolerance, and financial situation, one of the key advantages of managed accounts is that they can track a participant s changing circumstances over time and adjust portfolio allocations accordingly. Managed accounts can accommodate variations in participants needs and more complex situations because the model portfolio guiding the account is based on an individual profile, as shown in the illustration to the right. 12 The model portfolios selected for managed account participants are chosen after a comprehensive review process. The process begins with a proactive investment strategy proposal and participants are encouraged to provide additional information to help examine an individual s information about risk tolerance, time horizon, and financial circumstances. The Less Customized Plans Target date funds treat Participant A and Participant B similarly by solely using time to retirement. PARTICIPANT A AND PARTICIPANT B Age: 40 Retirement Age: 65 PAS-W Hypothetical Customization Large Growth review also considers assets held outside the DC plan, spousal assets, and other relevant details about personal finances. Some managed accounts, like Fidelity Portfolio Advisory Service at Work (PAS-W), can go further by considering company stock holdings. Different asset allocations can be used for managed accounts of participants who own company stock, and who choose at their discretion to have the service attempt to offset the risk of their company stock holding. This thorough review process helps the managed Managed accounts treat Participant A and Participant B differently based on personal risk and financial situation. PARTICIPANT A Age: 40 Plan Assets: $50,000 Risk Profile: seeks income and stability Company stock holdings: substantial Retirement horizon: plans to retire early PARTICIPANT B Age: 40 Plan Assets: $50,000 Risk Profile: seeks maximum growth Company stock holdings: none Retirement horizon: plans to retire later in life Conservative Growth account team create fully diversified model portfolios using the plan s investment options that are more tailored to match their needs. Stocks Bonds Short-term Investments For illustrative purposes only. 6

No minimums make investment management advice available to all Workplace managed accounts extend the benefits of professionally managed retail accounts to a much wider audience with no minimum balance and competitive advisory fees. 13 This can be a huge benefit for participants who want to leave the decisions about their investments in the hands of the professionals, but who may benefit from the no minimum and competitive fees. Offering managed accounts to meet today s challenges Participants who may benefit most from a managed account option: Have a different financial or emotional tolerance for risk (either higher or lower) than their age-based asset allocation would indicate Have more complex investment and personal finance considerations and/ or substantial assets outside their workplace plan Need or want more investment help such as participants near retirement Looking forward, we believe that the number of employers adding managed accounts to their workplace plans will continue to accelerate as these accounts prove to be an effective way for plan sponsors to boost employee participation and retirement readiness, while still managing their fiduciary risks and plan costs. We base this belief on our understanding that the factors driving the growing interest in managed accounts are not likely to change very soon, as: The DOL continues to emphasize the importance of advice in improving participant retirement results 4 Plan sponsors seek low-cost investment solutions that can improve their employees retirement readiness and help them meet their fiduciary obligations Plan participants embrace plan options that help them manage their investments with greater customization at a reasonable cost Fidelity s 20 years of managing discretionary accounts for individuals and the rapid growth we ve seen through our own workplace managed account program, PAS-W, reinforces our belief that the growing interest in adding managed accounts to workplace plans will continue for some time to come. A managed account option within a qualified retirement plan can complement other investment choices and help both plan sponsors and plan participants meet the ongoing business, personal, and market-related challenges of workplace retirement investing. 7

1 Deloitte 401(k) Benchmarking Survey, 2011. 2 From 20.7% in 2008 to 31% in 2012 (PLANSPONSOR, Oct. 2012). 3 Fidelity Press Release, April 25, 2013, Fidelity Investments Reports Significant Growth in Workplace Managed Account Business in 2012. 4 Source: Federal Register, Vol. 76, No. 206, Tuesday, October 25, 2011, Rules and Regulations 66151 66157. 5 Based on Fidelity Investments recordkept data from corporate DC plans as of March 31, 2012. Determination of not properly allocated is based on whether a participant is more than +/ 10 percentage points off from the Fidelity Freedom Fund equity rolldown schedule. The Fidelity Freedom Fund rolldown assumes a retirement age of 65. Freedom Funds are target date lifecycle funds designed to become more conservative and to hold a smaller percentage of equities as investors approach their retirement date. Investors should allocate assets based on individual risk tolerance, investment time horizon, and personal financial situation. A particular asset allocation may be achieved by using different allocations in different accounts or by using the same one across multiple accounts. The equity rolldown is not intended as a benchmark for individual investors; rather, it is a range of equity allocations that may be appropriate for many investors saving for retirement and retiring at age 65. 6 Based on Fidelity Investments recordkept data from corporate DC plans as of March 31, 2012. Includes all participants who are not 100% invested in either a target date fund or managed account. 7 Quotes are based on real statements from our 2011 Participant Loyalty Survey, but have been altered to omit names and personal information to protect identities of our customers. 8 Fidelity s Retirement Confidence Survey, 2012. 9 Source: Employee Benefit Research Institute and Mathew Greenwald & Associates, Inc., 1993 2013 Retirement Confidence Surveys. 10 Source: Segmenting US Investors, 2010, by Bill Doyle, Forrester Research, July 19, 2010. 11 Bloomberg (S&P 500 low of 676.53 on 3/09/09 to a high of 1669.16 on 5/21/2013 = percentage change. of +147%). 12 Is Loss Aversion Causing Investors to Shun Equities?, Fidelity Leadership Series Market Perspectives, February 2013. 13 Based on a comparison of the 2012 fee schedules of Fidelity Portfolio Advisory Service at Work and Financial Engines. The actual net advisory fee paid by participants will vary over time, and therefore may be higher or lower than the target. Fidelity Brokerage Services LLC 900 Salem Street Smithfield, RI 02917 Consider adding a managed account feature to your plan design. Please contact your Fidelity representative for a one-on-one consultation with one of our experienced PAS-W representatives. Views expressed are as of July 2013, based on the information available at that time, and may change based on market and other conditions. Fidelity does not assume any duty to update any of the information. This presentation does not constitute an offer or solicitation to any person in any jurisdiction in which such offer or solicitation would be unlawful. Nothing contained herein constitutes investment, legal, tax, or other advice, nor is it to be relied on in making an investment or other decision. No assumptions should be made regarding the manner in which a client s account should or would be handled, as appropriate investment strategies will depend upon each client s investment objectives. None of the information contained herein takes into account the particular investment objectives, restrictions, tax or financial situation, or other needs of any specific client. Certain strategies discussed herein give rise to substantial risks and are not suitable for all investors. The information contained in this material is only as current as the date indicated, and may be superseded by subsequent market events or for other reasons. The information provided by third parties has been obtained from sources believed to be reliable, but Strategic Advisers makes no representation as to its accuracy or completeness. Statements concerning financial market trends are based on current market conditions, which will fluctuate. This material may not be reproduced or distributed without the express written permission of Strategic Advisers, Inc. Generally, among asset classes, stocks are more volatile than bonds or short-term instruments and can decline significantly in response to adverse issuer, political, regulatory, market, or economic developments. Although the bond market is also volatile, lower-quality debt securities, including leveraged loans, generally offer higher yields compared with investment-grade securities, but also involve greater risk of default or price changes. Foreign markets can be more volatile than U.S. markets due to increased risks of adverse issuer, political, market, or economic developments, all of which are magnified in emerging markets. Investment decisions should be based on an individual s own goals, time horizon, and tolerance for risk. Diversification and/or asset allocation do not ensure a profit or protect against loss. Past performance is no guarantee of future results. Fidelity Portfolio Advisory Service at Work is a service of Strategic Advisers, Inc., a registered investment adviser and a Fidelity Investments company. This service provides discretionary money management for a fee. Third-party marks are the property of their respective owners; all other marks are the property of FMR LLC. For investment professional or institutional investor use only. Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917 2013 FMR LLC. All rights reserved. 651486.2.0 1.966767.100