The Future of Managed 401(k) Accounts.

At a recent TPSU training program, Jonathan Dues of Fisher Investment made the case for managed accounts. One plan sponsor asked why she needed it, after her retirement plan advisor provided guidance to her employees. Why incur additional costs?

The reality is that even the most well-intentioned HRD with significant resources cannot work effectively with every employee. Most still focus on the Triple F’s (fees, funds and fiduciary), and even the wealthiest retirement advisory resource firms do not have a proven wealth pool like wealth managers, who, by the way, are not equipped to help the less wealthy on the scale.

This is supposedly where managed accounts come in. The need for customization will only continue and not be met by target date funds, which were never meant to be the ultimate solution. Although they reached $3.5 trillion in 2023, according to Sway Research, they are still collecting the vast majority of new assets, and there is no end in sight.

In theory, managed accounts are much better than TDFs, even custom ones, which have yet to gain traction. But without hard data or commitment, managed accounts are just expensive TDFs as alleged by participants in Bechtel’s latest lawsuit.

At an industry conference for institutional plan sponsors, one large plan said its research showed that participants in managed accounts did no better than those in TDFs, even though they paid an extra 25 bps. When I asked an Edelman Financial Engines executive about this, he said, “Don’t compare us to TDFs — compare us to a financial advisor who charges 100 bps.”

When I asked him to clarify, he said they have 90 phone replays, which 20% of managed account users access. Although impressive, I wasn’t convinced that a managed account is anywhere close to a financial advisor.

But a light went on for me at the TPSU program if, in fact, the RPA of the plan meets all participants, why not just focus on getting the data necessary to fully utilize the managed accounts that can distribute and rebalance while the advisor briefly checks with participants to determine if any adjustments are needed? While it’s not a full-service financial planner, it’s still better than a TDF.

A caveat – young workers years away from retirement are still better off using less expensive TDFs with a focus on increasing contributions through automatic escalation, as supported by a recent NEPC book.

Ideally, data would drive personalization without the need for participants to engage, but data is limited, sometimes hidden, often inaccurate, and fraught with privacy issues. Participant engagement is the holy grail of many things, but especially managed accounts and retirement income.

So if an advisor, perhaps a new staff member, periodically checks in on participants guided by whatever data is available, they can not only fine-tune the managed account, but customize the embedded retirement income for the best workers. old. One commitment leads to another, building relationships and trust, as well as stronger data.

Like saving for retirement, the only possible way to get significant retirement income is if we make it automatic for them, asking them to opt in rather than opt in. Even the father of the auto plan, UCLA professor Shlomo Benartzi, agrees that commitment and customization are required for retirement income, which, while not as critical to savings, would do better.

The lack of data and commitment makes the costs of managed accounts seem high. And while prices will come down, if advisers use managed accounts as a tool to personalize investing and get more involved, then the path to retirement income is much easier as is providing scaled advice to the masses. .