Outsource account management
As we mentioned in our previous blog about qualified default investment alternatives (QDIAs), investing can seem complicated to employees. Many
individuals struggle with investment concepts such as diversification, asset
allocation, and rebalancing. They can also be overwhelmed by the responsibility
of selecting and monitoring their investments.
As such, the traditional approach of providing educational
materials detailing every aspect of investing in a retirement plan can be
ineffective. Instead, many of your clients’ employees simply want someone or
something to do the work for them.
This has resulted in the development of “do-it-for-me” solutions
that shift or outsource that responsibility to another party. These solutions include
risk-based (or lifestyle) investments, target-date (or lifecycle) funds, and
managed accounts.
Risk-based investments can place an individual’s contributions
in a mix of funds based on personal risk tolerance—the greater the risk
tolerance, the more aggressive the investment strategy.
Target-date investments can place an individual’s contributions
in a mix of funds based on the amount of time until retirement—the closer to
retirement, the more conservative the investment strategy.
If market activity impacts the investment strategy, both
types of investments will automatically rebalance the individual’s account to return
it to the intended mix.
Risk-based and target-date investments have become
especially popular as QDIA selections in defined contribution plans with automatic enrollment. According
to Cerulli Associates, target-date funds are used as the QDIA in these plans 69.8%
of the time, while risk-based funds are used 10.6% of the time.1
Typically, there is no additional cost to your clients or
their employees for risk-based or target-date options.
Managed accounts provide another alternative for the
hands-off investor. Individuals can choose to pay a fee to have a professional
money manager step in to analyze their personal profile. The manager then uses
this information to select appropriate investments, make savings rate
recommendations, allocate assets, and provide ongoing account oversight and
maintenance.
Managed
money solutions are garnering more and more attention among fee-based advisors.
According to a Cogent Reports study from Market
Strategies International, 76% of fee-based advisors now use a managed account solution.
This accounts for 61% of their total assets under management, on average.2
Offering your clients and their employees access to
managed accounts allows for the greatest level of customization and personal
attention. In addition, the money manager will also act as a 3(38) fiduciary, taking
on fiduciary status with respect to the employee. This approach satisfies the
needs of a plan’s “do-it-for-me” investors without interfering with the
preferences of “do-it-myself” investors.
1 Source: Cerulli Quantitative Update, U.S. Retirement Markets 2012.
2 Source: Advisor Trends in Managed Accounts™, quoted in Fallon, Anne. "Cogent Reports: Managed Account Use Expected to Grow Three Times Faster for ETFs than Mutual Funds." Market Strategies International, November 14, 2013. http://www.marketstrategies.com/news/2291/1/Cogent-Reports--Managed-Account-Use-Expected-to-Grow-Three-Times-Faster-for-ETFs-than-Mutual-Funds.aspx.