There’s a New Option in Your 401(k). Read This Before You Try It.
Jan 31, 2024
Managed accounts tailor retirement
investments to fit your life, but the higher costs may not be worth it for all
savers
What’s
the best option for your 401(k), one-size-fits-all or a custom fit?
Most
of us go with the one-size-fits-all option, putting our retirement
savings in target-date funds built to maximize returns based on our
timelines for retirement. A growing number of people, however, are choosing the
custom fit in the form of managed accounts, which seek to tailor investment
portfolios and advice to their situations.
As with clothing, the
custom option will cost you. What investors have to determine is whether a
managed account merits the price.
More retirement plans are
offering managed accounts as employers look for new ways to help late-career
workers plan for retirement. Some 41% of 401(k) plans that Vanguard
Group administers offered the accounts in 2022, up from about a third in
2018. About 10% of employees in those plans chose managed accounts, up from 7%
in 2017.
The cost of a managed
account ranges from about 0.25% to 0.45% of your balance each year, on top of
regular fund fees all investors pay, according to the consulting firm NEPC.
That is considerably more than the 0.19% average fee on target-date funds,
according to
. Vanguard’s popular option charges
under 0.10%.
The set-it-and-forget-it
appeal of target-date funds, coupled with the relatively low fees, has made
them the default option in most 401(k) plans. They attract more than 60% of the
money that flows into 401(k) plans and have helped put retirement
saving for millions on autopilot.
Already common in many
brokerage accounts, managed accounts are billed as a way to give tailored
investing advice to those who lack the hefty balances financial advisers
typically require.
A bespoke 401(k) can have appeal because everyone’s financial
situation and retirement
aspirations are different. The ideal candidates for these accounts are employees
who need more-personalized financial advice, such as help deciding when to
claim Social Security or how to pay off debt, according to consultants and
managed-accounts providers.
But
research suggests the services aren’t always worth the extra cost.
If
you’re not willing to put in the time to provide personal information, “it’s
like paying an ongoing fee for a gym membership you never use,” said Ben
Taylor, a consultant at Callan.
The case for managed accounts
Your
401(k) usually knows a few things about you, including your age, account
balance, salary and savings rate. Managed accounts start with those inputs and
ask for additional details, such as how much you and your spouse own outside
the 401(k) and your risk tolerance.
Research
shows that managed accounts can help people boost their 401(k) savings rates
and avoid the temptation to shift away from stocks when markets fall.
A 2017
study found savers using managed accounts earned 0.24% more a year after fees than
investors in target-date funds.
Managed accounts might have lost some of their edge since then,
however, since fees on many target-date funds have fallen in recent years,
according to David Blanchett, co-author of the study and head of retirement research
at PGIM DC Solutions, an affiliate of Prudential
Financial.
Not personal enough
Managed
accounts in 401(k)s rely on savers to put the time and effort in to provide
some of the key personal information, such as risk tolerance and outside
accounts, needed to customize the portfolios, retirement consultants said.
Without such effort, the results might not be that different from the cheaper
target-date funds—and could be worse.
A
report that the consulting firm Callan published in April on a $5 billion
401(k)-type plan found that a majority of the 9,800 workers in managed accounts
were in portfolios that closely resembled where they would have landed in the
plan’s target-date fund.
In a
large 401(k) plan that consultants at Aon
analyzed, more than 70% of managed-account participants had a stock allocation
similar to the plan’s target-date portfolios for people of similar ages,
according to a 2020 study.
Only about 15% of people in managed accounts typically provide the
information needed to personalize their portfolios, said Bill Ryan, head of
defined contribution solutions at NEPC. Without data on factors including risk
tolerance and outside account balances, people might miss out on the potential
for extra value that they are paying for, he added.
A
small fraction of employers auto-enroll workers in managed accounts, but most
plans that offer them leave it up to savers to choose to sign up. Most 401(k)
plans offer only one managed account service, making it impossible for
employees to comparison shop.
A case study in Alaska
The
state of Alaska recently closed a managed-accounts service called My Total
Retirement to new participants in the 401(k)-style plans it runs for
public-sector employees, citing relatively low performance and high fees.
A report commissioned by the Alaska Retirement Management Board,
which oversees the state’s approximately $6 billion in 401(k)-type plans, found
that of the 10,337 public-sector workers in the managed-account service, 2,851
had their allocation to stocks reduced owing to concern that higher exposure to
stocks could leave them further behind on their retirement savings goals.
Many
were put into portfolios with stock allocations 20 percentage points or so
below what they would have had in the target-date fund, said the report from
Callan.
Because
only 11% in the managed accounts provided information on their outside
holdings, the report said, it was hard to know whether those showing savings
shortfalls were truly behind.
Source: Wall Street Journal