Title: Managed Accounts: A New Direction for 401(k) Plans
Abstract: Companies, it seems, have tried everything to get their employees to save enough for a secure retirement. But all of the brown bag lunch seminars on the basics of retirement investing, matching contributions and even investment advice have only underscored the fact that companies can only do so much to help their After all, a self-directed 401(k) account requires the employee to make the appropriate investment decisions to secure his or her own retirement. Pension Protection Act of 2006 (PPA) provided employers with some new options such as auto enrollment, default investments and more latitude for providing investment advice (see sidebar Managed Accounts and the Pension Protection Act of 2006). But historically even when companies provide investment advice, a large number of employees do not implement the advisers' recommendations. As a result, employees continue to invest too conservatively or take on too much risk. Or they don't assess their investment strategy or rebalance portfolios over time. That is why a growing number of companies are beginning to offer their employees professionally managed accounts for 401(k) assets. According to Deloitte Consuhing's 2005/2006 401(k) Benchmarking Survey, 18% of the 830 companies surveyed offered employees managed accounts and another 17% were considering offering them. these managed accounts, an independent investment manager handles investment decisions, makes portfolio changes as needed based on each participant's specific needs and risk tolerance, and rebalances the portfolio at predetermined intervals, usually quarterly. There is absolutely more interest in managed accounts because companies are beginning to realize that self-directed 401(k) accounts are misunderstood by their employees, says Victoria Serles, CPA, national director of Private Client Wealth Management for BDO Seidman in Kirkland, Wash. Most employees don't know how to invest and don't understand things like asset allocation. As a result, employees don't pay attention to their 401(k) accounts, rebalance them or make good investment decisions. For example, some individuals put all of their assets in a money market account, which is not a productive option for someone who wants to grow a nest egg. It was this type of investment behavior that spurred Georgeco Inc., a construction and rental equipment holding company based in Dallas, to offer its employees a managed account option about five years ago. company's management was concerned that employees lacked the ability or interest to make their own investing decisions to the possible detriment of their retirement goals. Investing is a complicated field, and I've watched employees follow some questionable investment strategies, says Gary Barnes, vice president and co-owner of the company In general, employees tend to be ultra-conservative or ultra-risk takers, so we felt that offering access to qualified investment advisers was one of the best things we could do for most employees. Once an employee signs up for a managed account in the Georgeco plan, he or she must fill out a risk-tolerance profile that the adviser can use to develop an appropriate portfolio. a given year, about 40% of participants use the managed account option. The number of users has remained remarkably steady, says Barnes. CHOOSING A VENDOR If a company decides to offer managed accounts, it must find the right adviser to manage employees' assets. fact, choosing a vendor for managed accounts requires the same level of due diligence that plan sponsors bring to finding vendors for other aspects of the plan. Therefore, Series suggests companies assemble a due diligence team to evaluate the adviser candidates, including investment performance and the credentials of the investment professionals, and to gather information about how the managed account process will work. For example, the due diligence team should evaluate the process for establishing and maintaining the managed accounts, including how the advisers will gauge employees' individual risk tolerance, how frequently accounts will be rebalanced, how frequently the adviser will contact each participant, and how much access participants will have to advisers to ask questions about their accounts and investments. …
Publication Year: 2007
Publication Date: 2007-08-01
Language: en
Type: article
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Cited By Count: 3
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