Are managed accounts the key to helping investors in defined contribution (DC) plans like 401(k)s and 403(b)s to manage risk in times of market volatility? That’s the conclusion of research recently conducted by Fidelity which saw the number of plans offering managed accounts triple over the last four years.
According to Fidelity, almost half of larger DC plans (+5,000 participants) offer managed accounts while 33% of the smallest plans offer them. The lowest uptake is by plans with 50-1000 participants where less than 25% of plans provide access to managed accounts
A 2015 Vanguard research report, showed that participants can significantly improve retirement readiness using managed accounts showing an increase of 30% over 10 years. Reasons cited were an increase in the use of equities as well as higher deferral rates.
Though more plans are offering managed accounts, Fidelity concedes that most people don’t understand them requiring more education. The issue always comes down to engagement which is why Target Date Funds (TDFs) have become so popular. Investors in managed accounts must answer questions about their financial situation and risk tolerance – you only need to know a person’s age to place them into a TDF. Some firms are trying to use readily available data like age, account balance, salary and deferral rate as well as access to a DB or other outside financial information to create an appropriate portfolio but the assets in TDFs still dwarf these efforts.
For some large TDF providers like Fidelity, managed accounts offer a semi-customized solution to clients. There are many versions of TDFs in the market and, even if a DC plan finds one that best meets the profile of their employees, not all employees are alike. Managed accounts allow these employees to have a more customized portfolio but also leverage professional money managers which is especially important when markets are volatile. But as robo advisors are learning, even getting investors to answer simple questions, never mind making adjustment as their situation changes, can be very challenging.
