Employees fill out forms identifying their retirement goals, various risk parameters, and other relevant information such as stock holdings or a spouse’s retirement portfolio. Then Financial Engines takes over, for fees (paid by the employee) that start at 60 basis points for the first $100,000 in assets. “This has been a great success, way beyond my wildest expectations,” Prem says; 17% of employees had signed up for the service as of the end of 2009, nearly double the usual uptake, and 90% have stuck with it.
For the most part, the work is accomplished through online and phone interactions rather than the face-to-face meeting a high-net-worth client might get, and the portfolio shaping relies heavily on computer models.
The big question for managed accounts is whether they result in investment performance that is measurably superior to that provided by a semicustomized target-date fund. Managed accounts seem to work best for people in their mid-40s or beyond, because, as Hewitt’s Pam Ness notes, “That’s when target-date funds work a little less well, because people’s situations become more dissimilar as they get older.” The account balances of employees who avail themselves of managed-account services also tend to be lower than average — less than $49,000, typically, according to the analysis.
At Magnetek, a $100 million manufacturer of digital-power and motion-control systems, for example, the 70% of 401(k) plan participants that use ProManage represent only half the plan assets, says CFO Marty Schwenner, noting that “the ones with the bigger balances like to manage it themselves.” The company has been using ProManage, which charges about 25 basis points on assets under management, for almost 10 years, he says, with a consistently high usage rate throughout that time.
Schwenner says the option has been better for his “reluctant investors” than target-date funds because they take factors like position, salary, and other retirement benefits into consideration, even absent employee input. And while it’s hard to say exactly how much better those using the management service weathered the market meltdown last year, Schwenner says “we saw a lot of people who do not use the service move their money to fixed income after the market drop, and they’re still there, so they missed out on some big gains.”
Target Funds 2.0
Target-date funds continue to evolve. The professionally managed funds are customized for age or expected lifetime, and are automatically rebalanced as needed. Most surveys show that more than 75% of plans offer them, and more participants are beginning to choose them. “Asset-allocation funds, including target funds, now represent between 20% and 25% of total plan assets,” says Alan Vorchheimer, a principal in Buck Consultants’s New York office. “The whole industry thinks this is the future.”
Many companies that have automatic enrollment programs use the funds as a default option to give new employees a shot at a balanced portfolio. According to the Hewitt/Financial Engines report, the average participant enrolled in a target-date fund was 38 years old with 3.8 years of tenure and a plan balance of $6,295.