Surz challenges Morningstar study comparing managed accounts to TDFs

Ron Surz says the Morningstar study showing managed accounts outperform target-date funds does not compare two default options. Fiduciaries who defaulted participants into target-date funds did not make a mistake, he said in a Nov. 9 column in 401(k) Specialist.

Target-date funds hold about $5 trillion and are the most common qualified default investment alternative, according to the column. Managed accounts rank second among QDIAs at less than $1 trillion. The Morningstar study Surz addresses reports that managed accounts perform better than target-date funds, particularly in down markets.

For a plan committee weighing a managed-account default, the column shifts the review from outcomes to inputs. In Surz's description, a QDIA managed account estimates a participant's risk from recordkeeper wealth data without asking for a risk preference. Wealth measures the capacity to take risk, he said, while tolerance is the willingness to take it, and the two are not the same thing.

Surz says the studies miss a split between managed accounts where the participant engages, which he calls AMAs, and QDIAs that carry the managed label without any conversation. Fully managed accounts outside the default channel are the larger market: about $15 trillion, against less than $1 trillion in QDIA managed accounts, as Retirement Capital Daily previously reported on Oct. 28.

Surz argues the label overstates the product. QDIA managed accounts, he said, are permitted to describe themselves as managed while deriving an allocation from recordkeeper data instead of a stated preference. "The Morningstar study is not about QDIAs," he said. "It's about the value of good advice."

"You cannot personalize investments for people who will not talk to you; you can only guess," Surz said. He closed by warning beneficiaries and fiduciaries to be cautious about personalization that excludes participant engagement — a test a plan sponsor can apply to a default before it applies any performance study.