Some record keepers of defined-contribution retirement plans are diversifying the managed-account products they offer to employers and their employees in a bid to boost uptake and diversify their revenue streams in an environment of fee compression, according to experts.
Empower Retirement is the most recent example. The record keeper — among the largest, with $590 billion in assets and more than 9 million participants — debuted its Advisor Managed Accounts product Mar. 20.
Unlike a traditional managed account — a robo-adviser for 401(k) participants that tailors an asset allocation to an individual's goals and risk tolerance — Empower's service allows the retirement plan adviser to select the underlying investments. The adviser would serve as a fiduciary to plan participants and charge their own fee for the service.
Engaging 401(k) advisers in this manner via managed accounts — and giving them a way to get paid through managed accounts — is an emerging concept among record keepers, experts said. Schwab Retirement Plan Services Inc. has a similar service, which it launched in 2015.
The tinkering by managed-account providers largely comes down to record keepers trying to facilitate greater use by plan sponsors and participants. For one, managed accounts are generally more lucrative for providers than target-date funds, experts said.
In addition, most of the money flowing into target-date funds, which have become overwhelmingly popular investment options in 401(k) plans, has become concentrated among a few firms — primarily those focused on passive management, such as Vanguard Group. That leaves the rest looking for other revenue streams.
"I think the record keepers and asset managers want them to be much more popular than they are," Chris Brown, founder and principal of Sway Research, said of managed accounts. "I think this is going to be a big push."
Empower's new Advisor Managed Accounts appear to be a way to entice advisers to use its managed account product. While providers were the only ones making money on 401(k) managed accounts in the past, advisers can now get a cut, said Aaron Pottichen, senior vice president at Alliant Retirement Consulting.
A few advisory firms, including SageView Advisory Group, Mesirow Financial Retirement Planning and Advisory, and Resources Investment Advisors, have partnered with Empower to leverage the product.
Mr. Pottichen sees a big potential drawback: Unscrupulous advisers may select adviser managed accounts as a 401(k) plan's default investment option to increase their own revenue.
"It's an opportunity I think for people to misuse that relationship for their own benefit," Mr. Pottichen said. "I think there will be some rampant abuse."
While 71% of plans offer TDFs, only 40% offer a managed account. Employers also overwhelming prefer TDFs as the fund into which participants are automatically enrolled — for plans in which there's a default fund, three-quarters choose TDFs and only 9% use managed accounts.
Some advisers and plan sponsors have found the costs of managed accounts — typically higher than those of TDFs — to outweigh the benefits of the personalization that a managed account offers. Some advisers also remain skeptical because there's not an easy way to benchmark performance.
In 2016, Empower became the first provider to develop a product that automatically transitions participants from a TDF to a managed account at the time of a certain triggering event, such as turning age 55. Fidelity Investments followed with a similar product the following year.
Fidelity and Financial Engines Inc. have also looked to boost distribution through various partnerships. Financial Engines, which traditionally has focused on extremely large companies, partnered last year with record keeper ADP to access smaller 401(k) plans. Fidelity started making its managed account available on alternate record-keeping platforms.
Financial Engines and Fidelity, respectively the No. 1 and No. 3 largest providers by assets, have added more financial planning elements to their managed accounts, too. Financial Engines had $147.3 billion in AUM and Fidelity $38 billion at the end of 2018, according to consulting firm Cerulli Associates.