Record keepers are betting that 401(k) managed accounts will become more popular in relation to target-date funds, and advisors may stand to benefit as a result, InvestmentNews writes.
More Personalization, More Value Added — and More Revenue for Record-Keepers
In recent months, Fidelity Investments and Empower Retirement have rolled out automatic transitioning of plan participants from target-date funds to managed accounts tied to triggers such as a participant reaching a certain age or account balance, according to the publication.
And about a half dozen other asset managers are likely to unveil similar programs within a year, Louis Harvey, president and CEO of DALBAR Inc., tells InvestmentNews. This is great news for advisors, he says: managed accounts are superior solutions for plans, and being able to offer them means added value, Harvey tells the publication. They offer more personalization and tailoring of asset allocations compared to target-date funds, InvestmentNews writes.
But managed accounts often come at a bigger cost than target-date funds, with some collecting a minimum 0.50% fee in addition to the fees of the underlying mutual funds, according to InvestmentNews. So an automatic default transition based on some trigger is “a revenue play, pure and simple,” Michael Montgomery, managing principal of Montgomery Retirement Plan Advisors, tells the publication.
Others point out that managed accounts may not have enough necessary data about the participants’ assets held outside their 401(k) plans to be truly effective, InvestmentNews writes. If participants don’t give enough answers, the managed account in effect becomes “a glorified target-date fund,” Craig Stanley, the director of retirement plan consulting at Summit Group of Virginia, tells the publication.
Executives at both Empower and Fidelity believe that accurate information from participants is key for effective managed accounts, according to InvestmentNews. Empower sends out notices prior to the transition and allows plan participants to leave without charge in the first 60 days, Brian Cosmano, vice president of strategic product initiatives at Great-West Investments, tells the publication.
In addition, plan sponsors can have Empower call participants during the transition period, InvestmentNews writes. And if record keepers can get the right answers and boost participant engagement, managed accounts could become “a viable solution,” Stanley tells the publication.
