Fidelity follows Empower in launching TDF-managed account hybrid

Fidelity Investments, the largest retirement plan record keeper, has introduced a new service for defined contribution plans that would allow employers to default employees into either a target date fund or a managed account. Record keepers, up until recently, have only allowed for one qualified default investment.

The new service, called Smart QDIA, lets employers and their advisers set certain criteria, such as age, account balance, presence of a company stock fund and contribution amount, that would determine when participants are defaulted into one option or the other.

The managed account would be Fidelity’s proprietary product, Portfolio Advisory Service at Work, but the plan sponsor can elect to use non-proprietary funds on its core investment menu.

The service is similar to one that Empower Retirement, another of the large DC-plan record keepers, launched within the past several months.

Fidelity is rolling out the service to its larger clients first, but plans to gradually introduce it down market in the future, said spokesman Michael Shamrell.

“I think all the other record keepers will do this to be competitive,” said Todd Stewart, director of investment research at SageView Advisory Group. “If this record-keeping service becomes increasingly prevalent over the next year or so, and I think it will, I think you’ll see an uptick in managed accounts.”

The Pension Protection Act of 2006 provided legal protections for plan sponsors to default their employees into one of three investment options: a TDF, managed account or target-risk fund, together known as qualified default investment alternatives.

Target-date funds have been the undisputed favorite over the past decade. Of the 75% of 401(k) plans that use a QDIA, more than three-quarters elected a TDF, according to the Plan Sponsor Council of America. Just over 7% use a managed account.

(More: Some active target-date fund managers shine as passive management continues 401(k) onslaught.)

However, some feel that TDFs aren’t optimal for all participants because such funds provide the same asset allocation for similar-aged employees, without regard for characteristics such as risk tolerance or savings objectives.

The general thinking is managed accounts, which allow for a more customizable asset allocation based on particular data inputs, are better suited to older participants near retirement age, who may have more complex financial situations.

Managed accounts, though, have received flak for their fees. Such services charge for underlying fund fees as well as an overlay for advisory services. Those overlay fees can be upwards of 50 basis points, depending on the service.

Some target date mutual funds, on the other hand, have an all-in fee of less than 10 basis points.

Mr. Shamrell didn’t specify a fee for its PAS-W service, but said participants on average pay less than 50 bps.

Fidelity will also start offering a version of its managed account that strictly uses a plan’s index funds. The plan would need to have at least one index fund available per asset class to use the service.