Financial Engines Inc., a managed-account provider for 401(k) plans, is expanding its reach by partnering with record keeper ADP to bring its advice and investment management services down-market to small retirement plans.
With $160 billion in assets under management, Financial Engines is the largest managed-account provider in the defined-contribution market. It distributes its services primarily through record-keeping firms and traditionally has worked with employers sponsoring retirement plans with hundreds of millions or billions of dollars.
However, partnering with ADP gives the company a foothold at the smaller end of the 401(k) market, where it could compete with other providers such as Morningstar Inc. and retirement plan advisers looking to deliver advice to plan participants. Its partnership starts in the summer.
"Our current strategy has been to work with America's largest 401(k) plans, and this is the next evolution for us, which is bringing that expertise down-market into a place we think is underserved," said John Bunch, chief operating officer at Financial Engines.
ADP is among the largest record keepers by number of retirement plans, administering $70 billion in assets in more than 75,000 plans that serve roughly 1.8 million participants. Its average plan size is less than $1 million.
"We don't see [managed accounts] as prevalent in the smaller marketplace," said Steven Wylam, a partner at Shepherd Financial. "I definitely think there's some room for these guys to gain market space," he said of Financial Engines.
Managed accounts are similar to target-date funds in that investors' stock exposure is automatically dialed back over time according to a provider's glidepath. But managed accounts can personalize market risk based on different data inputs.
Though some have touted this personalization as a reason plans should consider managed accounts over TDFs as a default investment option, the latter have dominated 401(k) plans. Less than 8% of plans use managed accounts as a qualified default, versus more than 75% that use TDFs.
Total managed-account assets among eight providers represent only 4% of total defined-contribution-plan assets, according to Cerulli Associates, a consulting firm.
Some advisers wonder whether the additional expense of managed accounts, which can vary widely by provider, is worthwhile and say performance is difficult to gauge. Some managed-account products are also rife with conflicts of interest, as brokers and advisers are being incentivized to get participants to enroll in their company's service.
Competition has heated up in the managed-account market. Providers such as Financial Engines, Morningstar, blooom, Envestnet, Guided Choice and Stadion Money Management are increasingly competing with record keepers such as Fidelity Investments and Empower Retirement, who've debuted new products over the past year or so. And robo-adviser Betterment's record-keeping service comes pre-set with a managed-account offering.
Financial Engines has sought to distinguish itself by branching out with service offerings. For example, its acquisition of The Mutual Fund Store, an investment advisory firm, in 2015 allowed the company to offer investors comprehensive financial planning with live financial advisers.