Empower Retirement, one of the largest retirement-plan record keepers, and Capital Group, which sponsors the American Funds investment brand, have forged a partnership on 401(k) managed accounts that experts say offers a blueprint for how asset managers — especially those focused on active management — can retain more investor money.
The partnership builds on Dynamic Retirement Manager, a product Empower launched in 2016 that automatically shifts target-date-fund investors into managed accounts when they reach a certain milestone, like turning age 50.
Now, 401(k) participants who are invested in an American Funds TDF will still be automatically rolled into the managed account, but the funds underlying the managed account will mirror those in the TDF — in other words, they'll be in-house Americans Funds investments. A typical managed account uses the funds on a specific 401(k) plan's investment menu to build its asset allocation.
This means American Funds can automatically keep more funds in-house rather than see those assets roll to another asset manager, either in or out of the 401(k) plan, said Neil Bathon, managing partner at FUSE Research Network. That's especially true of a "decision point," such as approaching retirement age, when a participant may consider rolling assets to another product like an annuity, he added.
"The automated component of this is huge for American Funds," Mr. Bathon said. "Any decision point opens up your funds for scrutiny or review. This definitely would stave off that decision point that would otherwise cost you assets."
Empower is currently is discussions with other money managers to develop similar partnerships, said Brian Cosmano, vice president of strategic product initiatives at Great-West Investments, a sister company to Empower. American Funds is among the most popular active fund managers on Empower's platform, said spokesman Stephen Gawlik.
Mr. Cosmano said the product benefits plan sponsors and participants because the managed account would essentially offer a personalized version of the TDF they already have.
Some advisers are wary of automatically rolling investors into managed accounts if they're more expensive — especially if their asset allocation doesn't change much from one product to the other.
"My only concern would be if an individual goes from a target date fund with a 55/45 split of equities and fixed income to a managed account that is the same allocation," said Aaron Pottichen, senior vice president at Alliant Retirement Consulting. "Is that really a benefit for them? Especially since they may be incurring higher fees with the managed account."
Mr. Gawlik wasn't able to provide specific pricing information by press time, but said Empower doesn't adjust pricing relative to American funds' fees. American Funds' TDFs had an asset-weighted average expense ratio of 0.64% in 2018, according to Sway Research.
Empower has had a big focus on managed accounts over the past few years. In addition to being the first to market with the concept of its Dynamic Retirement Manager, last month it launched Advisor Managed Accounts, which allow advisers to select the underlying funds in a managed account. Empower has $2.5 billion in its dynamic managed accounts to date, from roughly 300 retirement plans.
Managed accounts haven't gained much traction in 401(k) plans. Just 9% of plans use a managed account as their default investment, compared with the 77% that default to TDFs, according to the Plan Sponsor Council of America.
In addition to retaining more 401(k) assets, American Funds likely will also see increased sales since it could benefit from Empower's promotion of the product, said Chris Brown, founder and principal at Sway Research.
"You know Empower behind the scenes will be working to make the Dynamic Retirement Manager more attractive than other options [available on its record-keeping platform]," he said.