Managed Accounts | Published in April 2012

The Sweet Spot

Managed accounts address older participants’ concerns

By PLANSPONSOR staff | April 2012
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Illustration by Marc Rosenthal

Managed accounts may have found their niche in 401(k) plans, amid sponsors’ growing concern about older employees’ retirement readiness.

The percentage of plans offering managed accounts increased to 38% in 2012 from 29% in 2011, according to Aon Hewitt. Of those sponsors not currently offering a managed account option, 24% characterized themselves as somewhat or very likely to add one in 2012. Not to say that everybody is flocking to these accounts. Still, a participant pickup rate in the 10% to 13% range “is a win,” says Pamela Hess, Aon Hewitt’s director of retirement research.

The sweet spot for managed accounts is participants aged 50 and older. As participants age, their financial situation becomes more complex, their concern about retirement adequacy grows and many need personalized help. “We see participant interest start to increase right about 40 years old, and, certainly for participants over 50, it is much more preferred,” Hess says.

Previously, plan sponsors often offered either target-date funds or managed accounts, says Brock Johnson, president of retirement solutions at Morningstar Investment Management. Most went with target-date funds. Increasingly, he says, employers see each as having a valuable niche. “They really do not feel that one size fits all, for all participants,” he says.

Now, 75% of plans utilizing Financial Engines Inc.’s managed accounts also offer target-date funds. “We really are seeing two different demographics using them,” says Chief Investment Officer Christopher Jones. “The typical users of target-date funds are younger than the average population, and they have a smaller balance.”

Likewise, managed accounts appeal more to older participants with higher balances. “Older employees with more-­complex situations tend to be more attracted to managed accounts,” Jones says. “Fifty-year-olds are more diverse than 30-year-olds, when it comes to their personal circumstances.” They also are far likelier than young employees to take time to offer the personal information that makes managed accounts more individualized and worth the extra fee, Hess says.

At the same time, sponsors worry more now about older employees’ retirement readiness. “This perception that sponsors do not feel like they have any responsibility [for deccumulation]—that philosophy is changing,” Jones says. “To the extent that accumulation is challenging for participants, deccumulation is even more anxiety-producing. And many of them look to a plan sponsor for help, because the plan is where the bulk of their retirement assets have been accumulated.”