By Mark Olsen, Managing Director at PlanPILOT
For many years, employer-sponsored defined contribution retirement plans have relied on target-date funds (TDFs) as a core investment option. In many cases, these funds also serve as the plan’s Qualified Default Investment Alternative (QDIA), the investment automatically assigned to new participants who have not selected their own holdings.
For employers who sponsor defined contribution retirement plans for their employees, TDFs offer numerous advantages to both the company and the employee participants. These include:
- Simplicity in choice and application: Target-date funds offer a simple, understandable, and automated choice for participants. Since the allocation is age or retirement-based, the funds are designed to adjust to lower risk over time in tandem as the participant approaches their designated retirement age. TDF investment and their popularity have grown over the years and have helped to increase plan participation.
- A prudent QDIA holding: As the default choice for new participants, TDFs have helped millions of participants get started with saving for retirement, helping these employees overcome investing anxiety and decision paralysis. For employers, TDFs are viewed favorably by regulators when assessing a plan sponsor’s prudence and oversight.
The Rise of Managed Accounts
While TDFs remain overwhelmingly popular, demand has grown for more personalized options that include greater asset and sector diversification, customization, and the ability to incorporate more individualized data points than the rather limited scope of a selected retirement timeline.
Managed accounts are portfolios supervised by professional investment managers who direct the asset allocation based not only on retirement age, but also other material financial factors (such as expected pension income or other assets) that target-date funds don’t consider.
One potential fatal flaw of target-date funds is the one-size-fits-all approach that fails to consider relevant investment criteria like the participant’s risk tolerance or investment experience. With managed accounts, portfolios may be tailored to account for these variables among participants, as well as whether accounts are sufficiently large enough to prudently accommodate wider diversification and alternative assets.
In essence, including managed accounts in a plan may allow for similar types of personalized investment advice that may be found with traditional financial advisors but in a more scalable and cost-efficient manner. Depending upon the composition of the participant demographic (for example, a high percentage of higher-balance accounts with older, experienced employees with more complex personal financial situations), managed accounts may serve as a favorable option for those seeking a more sophisticated solution to achieving their retirement savings objectives.
Pros of Managed Accounts
In addition to the ability to develop a highly personalized strategy, managed accounts offer several other advantages:
- Comprehensive advice: Plans may include an advice component that allows participants to interact with a financial advisor, something still highly desired among older participants. This feature can help to alleviate investor anxiety and emotionally based investment decisions, as well as provide clarity and objectivity.
- Flexible investment management: Today’s investors are well aware of the many alternatives to traditional stocks and bonds and increasing their interest and further participation may require the ability to diversify their investments with such alternatives. In addition, the ability to periodically rebalance or adjust allocations based on market conditions may also be desirable features.
Cons of Managed Accounts
Managed accounts do come with drawbacks, however, that ought to be considered in plan design or upgrades:
- Higher cost: Of course, with more features and services comes greater expense, especially for those with higher account balances if fees are percentage-based.
- Participant engagement: One feature of TDFs is the general “hands-off” nature of the investment. Managed accounts, on the other hand, require the participant to, well, participate, by providing additional personal financial information, preferences, and objectives, etc., to fully realize the benefit. Many could fail to do so.
- Increased plan sponsor fiduciary responsibility: Increased fees and complexity means employer sponsors need to exercise thoughtful care, due diligence, and document decision-making when implementing a managed account feature within their plan. Doing so could help avoid future adverse issues with regulators, auditors, and dissatisfied participants.
In summary, even if implemented as a hybrid solution with TDFs, managed accounts offer a flexible alternative investment solution for those participants desiring a more sophisticated, personalized approach to retirement savings and investment within their employer-sponsored plan.
Plan sponsors interested in upgrading their plan or implementing a new one would be wise to work with qualified benefit consultants who can offer customized plan design tailored to company objectives and resources as well as a good match with participant goals and demographics.
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Are you ready to upgrade to a new standard for your benefit planning and company retirement plan? Reach out to us at (312) 973-4913 or send an email to mark.olsen@PlanPILOT.com to learn more about how we can customize our services and your plan to fit your unique needs.
About Mark
Mark Olsen is the managing director at PlanPILOT, an independent retirement plan consulting firm headquartered in Chicago. PlanPILOT delivers comprehensive retirement plan advisory services to 401(k), 403(b), and 457 plan sponsors. His specialties include plan governance, investment searches, investment monitoring, and plan oversight. Mark is recognized as a leader in the industry and speaks at national conferences, including those organized by Pensions & Investments, and CUPA-HR.