Do It for Me
Sponsors who disagree, or simply want more choice, will
soon be able to offer their participants access to managed
accounts. Many of the nation's biggest plan providers
already have jumped onto that bandwagon, or are preparing
to do so. Most are taking advantage of the Department of
Labor's SunAmerica advisory opinion, now two and a half
years old, that says investment firms managing 401(k) plans
can offer investment advice to plan participants as long as
that advice is produced by an independent third party. AIG
VALIC and Merrill Lynch manage participant accounts based
on advice generated by Ibbotson's computers; Wachovia and
T. Rowe Price rely on advice generated by Morningstar; and
Strong has partnered with Guided Choice. Fidelity's program
is slightly different, offering plan sponsors the choice of
using either Ibbotson's methodology or that of Fidelity's
own registered investment advisor, Strategic Advisors Inc.
Mutual fund company Vanguard Group has taken a different
approach to managed accounts altogether with a program it
calls One Step. Based on participants' expected retirement
dates, One Step slots them into one of six Vanguard funds
that automatically shift to a more conservative asset
allocation as a participant's retirement date draws near.
When they retire, participants can get advice from Vanguard
on whether to start taking distributions from their plan,
roll it into an IRA, or invest in an annuity.
By contrast, most of the new managed account programs
look at the participant's age and life expectancy to
construct a diversified portfolio built on the investment
options offered within the participant's plan, and then
periodically adjust and rebalance the portfolio in response
to market fluctuations or, perhaps, changes in the funds
themselves. If participants wish, they can provide
additional information about their investment goals,
risk-tolerance levels, and outside investments and have
those items factored into their portfolio decisions but, in
most cases, there is no requirement that they do so. Most
of the programs use sophisticated Monte Carlo techniques to
gauge the possible performance of participants' portfolios
over a wide range of investment conditions.
The big question, of course, is whether 401(k) investors
will want managed accounts. Sponsors who witnessed the
hoopla over online advice in the late 1990sonly to
discover that it appealed to a very narrow segment of the
participant populationcan be excused for watching the
debut of managed accounts with a jaundiced eye. Yet, early
evidence indicates that the new accounts have some appeal.
Wachovia became one of the first plan providers to make
managed accounts available to its plan sponsor clients
beginning in April of last year, under the name
AdviceTrack. Since then, more than 200 of the 4,300 plan
sponsors it services have signed up for AdviceTrack, and
about 5% of the eligible participants have adopted it.
Fidelity tested its program, Fidelity Retirement Plan
Manager, with several plan sponsors last year and says it
had about 4% to 5% of the eligible participants sign on,
More encouraging was a test of Financial Engines'
managed account program, Personal Asset Manager, with
Motorola Inc. last year. The communications and electronics
company offered the service to 1,000 of the 45,000 active
participants in its $5 billion 401(k) plan. Financial
Engines tested 10 different enrollment strategies with 10
different subgroups among the 1,000 workers solicited.
Randy Boldt, director of global rewards for Motorola, says
that, with the three strategies that worked best,
enrollment rates ranged between 13% and 18%. At retailer
J.C. Penney, which conducted a similar pilot program last
year with its $3 billion 401(k) plan, enrollment rates
under the three most successful enrollment options ranged
from 19% to 23% (see "Revitalizing the Reluctant Investor's
Portfolio," page 43).
The top enrollment results at Motorola and Penney are
all the more notable because they included very few people
who had been users of Financial Engines' online advice
service, which had long been available to them at no cost.
For Motorola and Penney, this confirmed they were reaching
a segment of the participant population that had eluded
them in the past. "We wanted to get more than 10% of our
participants enrolled," says Boldt. "We thought if we could
get between 10% and 15%, this would be a program we would
move forward with and that, if it was less than 10%, we
probably wouldn't go forward with it." Motorola is still
evaluating the pilot program, he says, and is looking at
possible implementation of Personal Asset Manager planwide
sometime during the third quarter of this year. John
Walton, retirement plans delivery manager for J.C. Penney,
says that, while his firm is likely to implement the
service planwide as well, no formal decision had been
announced as of March.
While some employers may be willing to pay for the cost
of offering managed accounts to their employees, most
participants can expect to pay for the service on their
own. In the pilot programs at Motorola and Penney,
participants were told the service would cost them 50 basis
points annuallyone half of 1% of their assets under
management. Only later, after they had agreed to that fee
and had signed up for the program, were they told that they
would not actually be charged during the pilot itself.
Wachovia, by contrast, is charging 115 basis points for its
AdviceTrack program, and ProNvest charges 100 basis
Financial Engines President and CEO Jeff Maggioncalda
predicts a wide range of pricing options for managed
account programs as they become more widespread. "At the
high end, we see a lot of providers to the small plan
market charging in the 100 to 200 basis points range," he
says. "Often times those are broker-sold plans, so some of
the fees go to paying the broker. In the large plan market,
I think you're going to see prices in a range of 20 to 70
basis points, depending on how big the plan is and what the
utilization rate is."
Regardless of the financial impact on plan sponsors, no
one in the 401(k) industry is predicting that managed
accounts will solve the challenge of helping US workers
manage their own retirement accounts, but they may play a
meaningful role in helping millions of participants invest
more smartly than they do now.
"It is not inconceivable to envision a future in which
managed accounts are the norm," muses Jaime Punishill,
principal analyst with Forrester Research in Cambridge,
Massachusetts. "That would be the ultimate full circle,
with an individualized twist, of the old defined benefit
If so, it could end, at last, the increasing complaint
that American workers are not being given the tools they
need to function as their own retirement planners.