Participants are receptive, but it's too early to tell whether they'll be breaking down the doors to let their 401(k) plan provider manage their accounts for them, according to early plan sponsor results obtained by Pensions & Investments.
So far, only a handful of providers offer the service — which goes by such names as managed savings account and discretionary advice. Regardless of the name, participants hand over management of their 401(k) assets to the bundled record keeper. That service provider usually gets an independent financial expert to compile a set of model asset allocations, based on its review of the funds used in the program, but some services offer personalized asset allocation for each participant.
Among those offering, or planning to offer, the service: AIG SunAmerica, New York; Wachovia Retirement Services, Charlotte, N.C.; and Merrill Lynch & Co. Inc., Pennington, N.J.
The Labor Department's Employee Benefits Security Administration advisory opinion issued to SunAmerica paved the way for their companies to get into the managed 401(k) account business. In the December 2001 advisory opinion, the agency (then known as the Pension and Welfare Benefits Administration) said SunAmerica and other firms could offer managed accounts as part of bundled services for defined contribution plan sponsors.
Fidelity Investments, Boston, also is in the business, but doesn't use an independent adviser and offers Fidelity's Retirement Plan Manager only to participants with account balances of at least $10,000. Fidelity started pilot programs with two plan sponsors in March, and plans a full rollout of the program soon.
Industry insiders say Fidelity executives are negotiating with Ibbotson Associates Inc., Chicago, and are expected to launch a second managed account service with an independent fiduciary. Kathy Hopkins, executive vice president of Fidelity, said executives have been negotiating with a number of third-party companies. So far, no plan sponsor has requested that an independent third party be involved in the managed account program, Ms. Hopkins said. Fidelity executives do not expect to launch an alternative service until clients request it, she said.
Three companies that don't offer investment management also are trying to be players: ProManage Inc., Chicago; Scarborough Retirement Services LLC, a spinoff of investment advisory firm The Scarborough Group Inc., Annapolis, Md.; and Financial Engines Inc., Palo Alto, Calif.
Executives at many of the companies believe managed savings plans will grow into an asset-gathering bonanza. Early expectations are that as many as 40% of plan participants could be persuaded to sign on for the service.
Fees aren't set, but the consensus expectation is about 65 basis points — paid by the participant.
Still, it is anyone's guess whether managed savings accounts will be more successful than investment advice, said Joshua Dietch, associate director at Cerulli Associates, Boston. Investment advice offers counsel on how much should be invested in the different plan options, but it is up to the participant to follow through. In a managed account service, the bundled service provider manages the account. In some services, participants agree to increase their deferral rates to the plan each year, with the increases often tied to annual pay raises.
A test of the concept, giving rise to data that was presented to the EBSA, was devised by Brian Tarbox, chairman and chief executive officer of The Tarbox Group, El Segundo, Calif. His company consults to defined contribution plan service providers.
In April 1999, executives at a corporate 401(k) plan with 315 participants agreed to offer participants a managed account service. Half opted for the service, which also features deferral rates that increase automatically as salaries increase.