Managed Accounts:The Sweet Spot

Some people want help with issues such as how the pieces of the retirement-income puzzle fit together—for example, how much to spend from a pension plan balance versus from a 401(k), and how to coordinate that with Social Security benefits. “Those are the kind of questions that are not answered by a product solution like a target-date fund,” Jones says.

And Jones thinks many retiring participants who try to get that help in the retail marketplace will find it challenging. He points to data that show 401(k) participants aged 60 to 65 have a median account balance of $82,000, and says the most highly skilled financial advisers usually do not take clients with such modest balances. Even if people do get help, they may pay more. Fees for a managed account normally run 20 to 60 basis points (plus the underlying investment fees), he says. “That is about a third of the typical cost for discretionary management in the retail environment.”

Hess sees an emerging trend of employers embedding in their plan a retirement-income service—not an insurance guarantee—to help participants with drawdowns. “That is compelling, because more employees are struggling with what to do with the income. It is a nice service, and it is going to be more reasonable than retail products,” she says. From a sponsor perspective, it helps retiring employees and the assets stay in a plan, helping the plan’s purchasing power and benefiting active employees. “Expense ratios are going to be lower for everybody,” she says.

Morningstar has offered lifetime advice and managed accounts since 2006, for example. That allows participants to see their sustainable spending level through retirement, and to obtain a drawdown plan suggesting how much to take from each account they have, each year, in a tax-efficient way. Morningstar also provides recommendations about how much to invest (if anything) in in-plan annuities or other guaranteed products.

And last year, Financial Engines introduced Income+, an extension of its managed account program to 401(k) participants in the drawdown phase, which aims to provide steady monthly payments from a 401(k) for life. Part of a person’s portfolio goes into investments with an approach similar to the liability-driven investing strategy used by defined benefit plans, to ensure a steady stream of payments for the next 20 years. Part of the portfolio goes into equities, for growth, while another portion allows people to set aside part of their account value to supply an outside-the-plan annuity. Financial Engines now has eight to 10 plan clients using Income+, Jones says.

—Judy Ward