Managed Accounts: An Overview

Managed accounts are becoming a popular option within employer-sponsored retirement plans, such as 401(k)s. These accounts offer participants a personalized approach to retirement investing by providing professional management of their investment portfolios. Unlike target-date funds, managed accounts consider the participant’s unique financial situation, such as income, risk tolerance, retirement goals, and even spousal income. This allows for a more tailored and flexible investment strategy that can adjust over time based on individual circumstances [1].

How Do Managed Accounts Work?

When employees enroll in a managed account, the retirement plan provider partners with a financial advisor or investment management firm to manage their investments. The advisor creates a customized portfolio based on the participant's goals, regularly monitoring and adjusting the portfolio as needed. This differs from pre-set options like target-date funds, which are based solely on age and become more conservative over time. Managed accounts, by contrast, can adjust for changes in the participant’s financial situation or the market [1] [2].

For example, an employee nearing retirement may want to reduce risk by shifting to more conservative investments, while someone younger might opt for more aggressive growth strategies. Additionally, managed accounts can incorporate personal preferences, such as focusing on socially responsible investments or prioritizing higher returns in early career stages [3].

Benefits of Managed Accounts

The primary benefit of managed accounts is their customization. Employees participating in managed accounts often feel more confident in their retirement strategy, knowing that their portfolio is being professionally managed and personalized to their needs. Research shows that participants who use managed accounts report higher satisfaction and confidence in their investment choices compared to those relying on target-date funds or other standard options [4].

Managed accounts also provide regular portfolio rebalancing, which helps keep the participant’s asset allocation on track, especially during periods of market volatility. This feature ensures that the investments remain aligned with the participant’s risk tolerance and long-term goals [5]. Moreover, managed accounts can include financial tools that integrate outside assets, giving participants a holistic view of their retirement strategy [2].

Considerations for Employers

Offering managed accounts as part of an employer-sponsored retirement plan can significantly boost the overall value of the benefits package, making it easier to attract and retain employees. Studies indicate that participants with access to personalized advice, such as through managed accounts, are more likely to contribute to their retirement plans and maintain higher account balances [2].

However, managed accounts often come with higher fees compared to standard investment options like target-date funds. Plan sponsors need to consider the cost-to-benefit ratio and ensure that the managed account provider offers robust fiduciary oversight. This includes making sure that the advice provided is in the best interest of plan participants, as well as reviewing the service provider’s performance regularly to ensure they meet agreed-upon standards [1] [6].

The Future of Managed Accounts

As more participants seek personalized investment options, the use of managed accounts within retirement plans is expected to grow. According to recent reports, the demand for managed accounts has risen substantially in recent years, with more providers offering this service to meet the needs of a diverse workforce [6]. As retirement planning becomes more individualized, managed accounts are likely to become an integral part of many employer-sponsored retirement plans.

By providing professional management, personalized investment strategies, and the flexibility to adjust as participants' circumstances change, managed accounts offer a compelling alternative to traditional, one-size-fits-all investment options. Both employees and employers stand to benefit from this tailored approach to retirement planning.

References:

[1] Retirement Advisor. (2022). Time to take a closer look at managed accounts. Retrieved from https://www.retirementadvisor.us/index.php/viewpoint/time-to-take-a-closer-look-at-managed-accounts

[2] Edelman Financial Engines. (2023). EFE releases new report analyzing 20 years of 401(k) data. Retrieved from https://www.edelmanfinancialengines.com/press/efe-releases-new-report-analyzing-20-years-of-401k-data/

[3] Lord Abbett. (2022). A growing trend in 2022: Managed accounts in retirement plans. Retrieved from https://www.lordabbett.com/en-us/financial-advisor/insights/retirement-planning/a-growing-trend-in-2022--managed-accounts-in-retirement-plans-b-.html

[4] Cerulli Associates. (2022). 401(k) managed account investors more confident in retirement investment strategy than non-advice users. Retrieved from https://www.cerulli.com/press-releases/401k-managed-account-investors-more-confident-in-retirement-investment-strategy-than-non-advice-users

[5] National Association of Plan Advisors. (2023). Managed accounts. Retrieved from https://www.napa-net.org/topics/managed-accounts

[6] Edelman Financial Engines. (2022). Managed accounts: A closer look at personalized 401(k) investing. Retrieved from https://www.edelmanfinancialengines.com/retirement/managed-accounts-a-closer-look-at-personalized-401k-investing 

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