For many employees, it's easier and less painful to choose a cell phone provider than to navigate the often mystifying plethora of 401(k) investment options. Once participants do lock in an investment strategy, only 14% play an active role in managing their funds. "There has been a high level of inertia," says Michael Doshier, vice president of marketing for retirement at Fidelity Investments.
Now, for those who lack the confidence or time to manage their accounts, 401(k) providers, such as Fidelity, Vanguard, Mercer and JPMorgan, will do the heavy lifting. Although the option has been available for years, plan sponsors only recently took notice after the Labor Department approved such managed accounts as a qualified default investment alternative for automatic enrollment. The other two options: balanced and target date funds.
A recent Hewitt Associates survey of 190 executives showed that 22% now offer managed accounts for defined contribution (DC) plan participants, up from 15% last year. Another 6% plan to add them this year as employers seek to arm employees with retirement plans best suited to their individual needs and risk tolerances. "We are going to look back and recognize that 2007 marked the beginning of a transformation of our 401(k) system from do-it-yourself to 'do it for me,'" says Jeff Maggioncalda, president and CEO of Financial Engines, which provides independent investment advice and managed accounts to DC plans. Investment firms will also be pushing managed accounts more rigorously, since the 2006 Pension Protection Act allowed them to recommend their own funds.
Of course, service comes at a price. Doshier says that Fidelity charges 35 to 60 basis points, which is generally higher than fees for target date funds. For young employees, suggests Lori Lucas, DC practice leader at investment consulting firm Callan Associates, managed accounts might not provide much value. "When you start, all anyone knows is your age and salary," she notes. "Managed accounts make more sense when the participant has [a work history] and more detailed information."