Why haven’t 401(k) managed accounts gained more traction?

Retirement savers who get professional help with their 401(k) portfolios stand a good chance of seeing better outcomes than those who don’t. But that doesn’t mean plan sponsors or participants are rushing to adopt one-on-one advisory services.

The U.S. Department of Labor gives defined contribution plan sponsors three options for a qualified default investment alternative (QDIA), which are to be used if a plan participant doesn’t make an investment election on their own (many don’t). The options are target date funds (TDFs), managed accounts and balanced funds. While all three offer a professional framework for managing assets, one-on-one managed account services have the potential to deliver stronger results.

So why don’t more sponsors use them? Target date funds continue to be the portfolio management tool of choice. At plans served by Vanguard, for example, 45 percent of participants were completely invested in an automatic option at the end of 2014—39 percent of them in a TDF. Just four percent were using a managed account program—a figure that has barely budged from 3 percent in 2010 (2 percent were in a balanced fund).

A Towers Watson survey reflects similar results. TDFs are the default QDIA for 86 percent of plans, up from 64 percent in 2009; managed account services make up just three percent of default sponsor choices.

It’s not that plan sponsors aren’t adding managed account services—22 percent of Vanguard-served plans offered the option last year, up from 13 percent in 2010. But TDFs most often win out as the default investment for participants who don’t make their own selections, due to their simplicity and automation.

In my Wealthmanagement.com column this month, I explore reasons why managed accounts haven’t gained more traction.

Speak Your Mind

*