Managed accounts, products introduced to cater to high-net-worth investors, are gaining popularity as a participation-booster for the less affluent investors who are eligible to save for retirement in 401(k) programs, financial company officials and other observers say.
Low participation rates have plagued 401(k) programs, and these executives think the more personalized investment planning that is a hallmark of managed accounts will encourage eligible employees to sign up for the company-offered plans.
Don Salama, the managing director of marketing and sales at NYLIM Retirement Plan Services, a division of New York Life Investment Management, said that managed accounts have become more important as 401(k) plans have "been broadly ineffective" in getting more plan participants to save for retirement.
"401(k)s are a structured, do-it-yourself vehicle" that is not drawing more employees, he said. "It's a crisis in the making," he said, because plan participants are "undersaving" by a large amount.
The 401(k) industry has offered online independent investment advice in an effort to increase employee enrollment and to encourage saving. "No one used it," he said, though, with only about 5% of participants taking advantage of their access to the advice.
Mr. Salama predicted that managed accounts would have an impact on the industry and the product's popularity would skyrocket in the next five years. "It is the future of 401(k) plan management," he said.
Bert Dalby, a principal at Vanguard Group in Malvern, Pa., said that half of 401(k) participants want to manage their own 401(k)s and the other half would like to outsource management responsibility. Financial Engines Inc. in Palo Alto, Calif., supplies personalized portfolio management to Vanguard clients.
Managed account programs' main draw, Mr. Dalby said, is that the product takes outside assets into account when considering retirement preparedness. "It looks at company stock and multiple fund families and other outside assets," he said.
Brian Tarbox, the chief executive of Tarbox Group, a Minneapolis consulting firm, said, "The evidence is pretty clear that once you get the attention of the participant" he or she is likely to opt for a managed account option.
"The real challenge is getting the attention of existing participants," he said, which requires breaking the inertia that attaches to investment decisions already made.
"We needed to raise the bar to help participants," said Mr. Salama. NYLIM's managed account program combines an investment advice feature with a managed savings component. "It's a newer theme. It's how you can control a participant's savings without them being concerned," he said.
Mr. Tarbox has worked with companies like Wachovia Corp. to set up managed account programs. "Banks are interested in rollover assets," he said, "and you can't wait until the rollover process, unless you're a brand name like Schwab or Fidelity, to develop trust."
Keith Sykes, the defined contribution product manager at Wachovia's retirement services division, said the Charlotte banking company decided to develop a managed account option to meet client demand.
"Plan sponsors wanted something to increase enrollment and increase savings," said Mr. Sykes, and lifestyle funds were not doing the job. "Participants have not signed up en masse," he said, for targeted lifestyle fund options.
Mr. Sykes agreed that managed accounts are the future in 401(k)s. "It's a 'must have' these days," he said.
Wachovia has 281 plan sponsors signed up for managed account options and hopes to have 800 within five years, said Mr. Sykes.
Wachovia's offering, AdviceTrack, will develop, execute, and maintain a personalized investment strategy based on recommendations from Morningstar Inc., Mr. Sykes said. Participants' portfolios will then be monitored and updated with periodic reviews of investment performance and market conditions.
As for NYLIM, its product features professionally managed accounts, automatic savings increases, and regular updates on participant portfolios. The company also will be a fiduciary for this service.
"The significant driver to getting to retirement is not just investing, it's saving," Mr. Salama said.
Managed accounts pick up where 401(k) education has failed, he said. They urge participants to take control of their 401(k) investments and automatically increase their savings rates.
NYLIM decided to roll out this product in response to customer demand, he said, explaining that the company's communication specialists would visit plan sponsors and discuss their challenges. "Some sponsors said that many participants are not using the plan or are not saving enough," he said, and many sponsors were looking for a managed account feature.
The product is available to 401(k) plan sponsors with more than $15 million of assets, and the company is planning a first-quarter rollout. NYLIM does not have specific sales goals, Mr. Salama said, but he hopes to see a 40% user rate within a few years. That would be up from today's very much smaller rate, which he would not specify.
NYLIM's managed account program is served by Morningstar Associates LLC, a subsidiary of the Chicago mutual fund rating company.
John Rekenthaler, the president of Morningstar Associates, said his advisory unit would create customized portfolios for NYLIM clients. Morningstar also will give NYLIM continuing monitoring and rebalancing services. The main advantage for banks or other financial services companies is that this helps meet plan participants' advice needs, he said.
"Right now the dominant product is an online advice tool, which Morningstar offers, but it's not a complete solution," Mr. Rekenthaler said.
The managed account option will become more conservative over time and ensure that a participant does not have too much weighting in one area, said Vanguard's Mr. Dalby.
Vanguard, which started its program Oct. 1, has no specific sales goal, Mr. Dalby said, but expects no less than 10% of plan participants to be interested.
It is important to remember that "401(k) is not a one-size-fits-all option," he said. "A big part of the future of 401(k)s is that folks want someone to manage it for them," he said.
Vanguard's product selects a portfolio of low-cost, diversified funds for participants based on their personal risk preferences, and it takes into account a client's desired retirement age, nonplan assets, and company stock investments, said Mr. Dalby.
"The simpler the product, the higher the enrollment. This is where the industry is going to go," he said. The industry is focusing on managed accounts, lifestyle options, and pure index funds, he said.
"Managed accounts in 401(k)s are in its infancy," said Mr. Rekenthaler, "and a growing number of providers have come up with this solution."
Other 401(k) providers have approached Morningstar, he said, but he declined to name them.
"The product is far more popular than it was 12 months ago," he said.
