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Managed Accounts Going Down-Market in 401(k)s

Many providers of separately managed accounts are beginning to pitch their wares to 401(k) sponsors, touting their personalization as a way of boosting participation and savings rates. Don Salama, managing director of marketing and sales at NYLIM Retirement Plan Services, a division of New York Life Investment Management, noted that even though many 401(k)s offer online independent investment advice, only about 5% of participants use it. As a result, 401(k)s are underutilized, do-it-yourself vehicles--"a crisis in the making," he said.

Managed accounts pick up where 401(k) education has failed by inspiring investors to take control of their 401(k) investments and automatically increasing their savings rates, Salama said, predicting the popularity of managed accounts in retirement accounts will skyrocket in the next five years. "It is the future of 401(k) plan management," he said.

Bert Dalby, a principal at Vanguard, estimated that half of 401(k) participants would welcome handing over the management of their 401(k) to an SMA portfolio manager who would also take into account their ownership of "company stock, multiple fund families and other outside assets."

Brian Tarbox, CEO of Tarbox Group, a consulting firm, said, "The evidence is pretty clear that once you get the attention of the participant" he or she is likely to opt for a managed account option. "The real challenge is getting the attention of existing participants." NYLIM's managed account program tries to get investors' attention by combining an investment advice feature with a managed savings component. It also offers automatic savings increases and regular portfolio updates, with NYLIM acting as fiduciary.

Keith Sykes, the defined contribution product manager at Wachovia's retirement services division, said the banking company decided to develop a managed account option because "plan sponsors wanted something to increase enrollment and savings," and lifestyle funds were not doing the job. He concurred with Salama that managed accounts are the future in 401(k)s. "It's a must have' these days," he said. Currently, Wachovia has 281 plan sponsors signed up for managed account options and hopes to have 800 within five years.

Wachovia's offering, AdviceTrack, develops, executes and maintains a personalized investment strategy based on recommendations from Morningstar. Participants' portfolios are then monitored and updated with periodic reviews of investment performance and market conditions.

NYLIM also decided to roll out a 401(k) SMA in response to customer demand. "Some sponsors said that many participants are not using the plan or are not saving enough," Salama said. In fact, many sponsors specifically asked for a managed account feature.

It is important to remember that a "401(k) is not a one-size-fits-all option," Dalby said. "A big part of the future of 401(k)s is that folks want someone to manage it for them. The simpler the product, the higher the enrollment. This is where the industry is going to go."