Understanding 401(k) Managed Accounts
A 401(k) managed account is a personalized investment strategy that is tailored to the individual needs of the plan participant. Unlike traditional 401(k) plan investment lineups, which typically offer a limited selection of mutual funds, managed accounts consider factors such as the participant's age, risk tolerance, and retirement goals in recommending a portfolio. This level of customization is a key factor driving the usage of managed accounts. In fact, 77% of workers would be interested in a more personalized 401(k) option tailored to their unique financial situations.2
Moreover, managed accounts offer professional investment management, which can be particularly valuable for periodically assessing whether the participants are on track to meet the goals set forth in their managed accounts and adjusting as needed in volatile markets. Managed accounts have demonstrated the ability to improve participant outcomes, including a 22% higher savings rate (vs. participants without a managed account) and higher engagement overall (78% engaged among managed account vs 57% engaged among target date fund (TDF) users). 3
The Strategic Opportunity
For plan sponsors, offering managed accounts can be a powerful tool for attracting and retaining employees. In a competitive job market, a robust retirement plan can be a significant differentiator. Moreover, by offering a more personalized retirement planning solution, plan sponsors can demonstrate their commitment to their employees' financial wellbeing, especially those who lack financial knowledge and confidence. Those participants who are reluctant to select their own investment allocations in their 401(k) accounts may feel more confident in maintaining contributions and staying invested for the long term with a managed account option whereby the investment manager of the 401(k) plan allocates funds and automatically re-balances or reselects funds to reflect the participant’s stated goals and time horizons. And, according to a recent report by Cerulli, managed accounts programs outperformed client-directed portfolio by 4% over a 10-year period.4 In this regard, plan sponsors can feel confident about offering a solution like managed accounts with research to prove they can potentially lead to better participant outcomes and higher confidence in reaching retirement goals.
Conclusion
Of course, offering 401(k) managed accounts may require plan sponsors to readjust their existing 401(k) plan platform and infrastructure, as well as a commitment to ongoing education for plan participants to encourage their enrollment and engagement. In Cerulli’s study, it was found that 70% of participants were not able to identify the correct definition of defined contribution managed accounts.2 Plan sponsors will need to communicate about these programs in a way that connects and translates retirement industry jargon into terms that everyday investors can understand and relate to. Once employees understand the benefit of these programs, the same Cerulli study showed that 47% of those participants enrolled in a managed account program reported feeling very confident in their retirement strategy, versus only 16% of non-advice users.2
While the path to offering managed accounts may be challenging, the potential company and employee opportunity to improve financial health make it a journey worth exploring for plan sponsors.
To learn more about how 401(k) managed accounts can potentially enhance your 401(k) retirement plan strategy, we invite you to contact a Morgan Stanley Financial Advisor. Our team can provide insights and guidance to navigate building a managed account offering, the evolving financial landscape, and help employees make the most of your organization’s financial benefits.
