Most 401(k) plan participants don’t understand the difference between a target-date fund and a managed account and are clueless about their benefits, according to new report from Cerulli Associates.
When asked to select the correct definition of the two investment products, about two-thirds (67% and 71%, respectively) were either “not sure” or selected the wrong definition.
More than 1 in 5 (21%), for example, mistakenly believed that a target-date fund “pays interest until it distributes its principal back to shareholders at a specified future date.” Almost as many (17%) incorrectly thought that a managed account is offered by financial advisers separate from their 401(k) plans.
Participants, however, are not unaware of their lack of knowledge, with 70% agreeing that a financial professional could do a better job of managing their retirement assets.
The report, which was developed with support from managed accounts provider Edelman Financial Engines, frames managed accounts as a potential solution for 401(k) plan participants who lack confidence in their ability to manage their retirement assets and are seeking access to human advice.
Managed accounts, unlike target-date funds, give participants access to human advisers.
Cerulli reported that about 50% of participants identified the ability to speak with a human adviser as one of the top-two most valuable aspects of financial advice.
Cerulli also noted that those enrolled in a managed account were three times as likely to state that they were “very confident” in their retirement investment strategy. Almost half of managed account users (47%) reported feeling very confident, whereas only 16% of non-users reported similar confidence, according to the report.
The report comes as a new brand of target-date funds called “personalized target-date funds” become available in the market, offering participants a more cost-effective alternative to managed accounts.
“They may be less expensive but offer a different set of services than a managed account,” said Brendan Powers, Cerulli’s director of product development, referring to personalized target-date funds. “A managed account has the flexibility to take into account more participant information than a personalized target-date fund.”
Managed accounts also provide an “advice component,” which personalized target-date funds don’t provide, Powers added.
“The research notably found that a significant portion of plan participants value the ability to talk to a human being who they can call,” he said.
Partly due to poor understanding, managed accounts remain underutilized, according to the report.
To increase adoption of managed accounts, Cerulli encourages the industry, including employers, to frame their managed account program not just as an “investment product” but as an “employee benefit” that can improve participants’ financial and emotional well-being.
The report is based on three focus-group discussions with 401(k) participants in February. It also draws on a survey of 823 active 401(k) participants, including both managed account users and non-users, that took place in February and March.
