Professionally Managed Accounts Boosting Retirement Fund Results

By Patty Kujawa

Oct. 29, 2013

Companies are still struggling with the best way to prepare workers for retirement.

While target-date funds are the most popular way to offer sophisticated investment strategies, more plan sponsors are turning to professionally managed accounts in their 401(k) plans to improve results, a new study shows.

Last year, nearly 37 percent of plan sponsors offered professionally managed accounts in 401(k) plans, according to the Plan Sponsor Council of America’s 56th annual survey Reflecting 2012 Plan Experience. Compare that to 2008 when only 26 percent of plan sponsors offered the strategy.

“Plan sponsors recognize the complexity of investments and their terms,” said Bob Benish, the PSCA’s president and executive director. “This is a logical evolutionary progress knowing that there are tools out there that can maximize people’s ability to save for retirement.”

There are three ways participants can get help with their retirement plans today. According to the PSCA’s numbers, managed accounts have seen the largest percentage-point gain since 2008.

Participants in professionally managed accounts usually have their 401(k) assets managed for them. They have little to no investment decisions to make. Often, managed accounts can consider outside financial information from participants — like other retirement plans, individual retirement accounts or loans — when making 401(k) plan investment recommendations.

Target-date funds are a mix of stocks and bonds that are put on a set glide path; over time, the investments in the fund automatically rebalance and get more conservative as workers near their targeted retirement date. Because they are easy to understand (all employees need to do is match a desired retirement date to a target-date fund), they have become popular with plan sponsors and participants. In 2012, 64.5 percent of plans offered target-date funds compared with 57.7 percent in 2008.

Because of a 2006 federal law, plan sponsors using automatic enrollment can start workers in 401(k) plans investing in managed accounts or target-date funds.

Participants can also get help through online advice, but that strategy is losing traction. PSCA data showed that about half of plans provided investment advice in 2008. Last year, that number slipped to only 35 percent of respondents. In 2008, only 28 percent of participants used the advice when offered, and in 2012 that number dropped to 17 percent. PSCA’s report surveyed 686 plans covering 10.3 million participants with $769 billion in plan assets.

Chris Jones, chief investment officer for Financial Engines Inc., said plan sponsors with aging workforces are turning to managed accounts. Financial Engines, which started out as investment advisory group, now offers managed accounts for 530 plans covering 713,405 participants with $74 billion in assets.

“As you get older, mid- to late 50s, people need more help” in terms of creating an effective savings strategy, Jones said. “Deciding on how to manage your 401(k) can have big implications.”

Often participants can fare better with a managed-account approach. According to a July report from Morningstar Investment Management, managed-account participants are likely to see a 1.2 percent bump in returns over those who try to figure it out on their own. That can add up to $6,700 more in retirees’ pockets each year.

“Savings is perhaps the most important driver of retirement success, because it’s the savings — and the potential growth of the savings — that is going to fund retirement,” Morningstar’s study said. “Portfolio returns are perhaps the next most important driver of retirement success.”

Morningstar officials would not comment on the report.

Still, many plan sponsors are hesitant to add managed accounts. In its April survey of 51 consulting firms, Pacific Investment Management Co. found 32 percent of consultants don’t recommend managed accounts to plan sponsors. That is up considerably from 13 percent last year.

Nearly two-thirds said they had concerns about the value that managed accounts add relative to the investment option used to automatically enroll participants.

“Many people go into these accounts and don’t use the full power of them,” said Stacy Schaus, PIMCO’s executive vice president and defined contribution practice leader. “Plan sponsors need to be aware of costs and whether their population is going to use the service.”

Patty Kujawa is a writer based in Milwaukee. Comment below or email Follow Workforce on Twitter at @workforcenews.

Patty Kujawa is a freelance writer based in Milwaukee.

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