Retirement investing is getting personal. Advisors must proceed wisely

You’re shopping for a suit for your wedding. You have a specific fit and color scheme in mind, so you’d prefer something bespoke. But you live in an isolated area. You can’t shop around for consults—there’s only one tailor in town. You could buy a ready-to-wear suit online and save some money, but it might not meet the vision. Should you get the bespoke suit and pay monopoly prices, or roll the dice with the off-the-rack options?

That’s a bit like the process of evaluating 401(k) managed account services today. When your record keeper only offers one or two providers, benchmarking these services is difficult. While it’s human nature to favor the custom product, advisors should weigh if the personalized approach to retirement investing is always worth the added cost.

Even with such limited options, advisors have the fiduciary duty to evaluate managed account services with the same due diligence they apply to other plan investments and service providers. Managed account services may not be a fit for all types of participants. Simply accepting the record keeper’s default option can expose plans to risk.

The strong traction for managed account services leads me to believe advisors will face a much wider selection in the next five to ten years. Establishing a clear benchmarking process now can help them prepare for a future with more options and determine whether managed account services serve participants’ best interests today.

The first step in the evaluation process is understanding what types of clients can see the most value from managed account services.

Which clients can benefit from managed accounts?

1. Participants in their 40s, 50s, and 60s

Financial circumstances like debt levels, home ownership status, and family obligations become more varied as participants age. Managed accounts can help older participants’ portfolios reflect their full financial picture.

2. High earners with complex financial situations

Managed accounts can incorporate external assets and offer tax-aware investment strategies for participants with significant assets outside their 401(k)s.

3. Plans with significant participant misallocation

If a large percentage of participants are over- or under-allocated in equities relative to their age and risk tolerance, personalized retirement plans may provide a better investment vehicle, with features that go beyond investment allocating. Many managed accounts offer robo-advisors to guide participants to increase their contribution rates and optimize Social Security claiming strategies.

Proposing a process for benchmarking managed account services

That brings us to the second step in the evaluation process: reviewing participant allocations to assess whether the value of personalization justifies the extra fees. If a significant portion of participants are misallocated, consider a Qualified Default Investment Alternative (QDIA) re-enrollment.

Next, define what level of personalization the plan needs given the participant demographics. Model portfolios or target date funds may offer sufficient customization for younger and fee-sensitive participants. But if they need a more advanced framework for optimizing their next dollar, managed account services can incorporate and be frequently fine-tuned with a variety of data points, like contribution rate, marital status, and assets outside the retirement plan.

Now it’s time for cost-benefit analysis. Some managed account fees can run as high as 40-65 basis points or as low as single-digit basis points on top of the weighted investment expenses of the portfolio. Depending on the needs and priorities of the plan it may be worth changing record keepers to access a better provider. If a switch isn’t on the table now, it may still be worth comparing provider costs and services for when you’re ready to make a move.

Finally, be sure to document the process for compliance. Maintain records of your decision-making rationale, including participant value assessments, cost comparisons, and personalization metrics.

More competition, more responsibility

Eventually, managed account services will likely become as commonplace as target date funds. Advisors can expect to have more options as open architecture becomes standard and record keepers integrate multiple managed account providers. Some are already incorporating broader financial planning features—for example, offering advice on student loans, Health Savings Accounts (HSAs), and debt repayment.

Increased competition puts greater responsibility on financial advisors to select the right provider. When more choices become available, advisors who already have a clear benchmarking process should be well-positioned to make strong recommendations, maximize participant outcomes, and confidently fulfill their fiduciary duties.

As managed account services and the technology behind them continue to evolve, the key question won’t be, “Do participants need a managed account?” but rather, “Which provider offers the best value?” In other words, if you want a bespoke suit, you’ll likely have plenty of tailors to choose from.

Ronnie Cox is the Investment Director for Human Interest Advisors (HIA), an SEC-registered investment adviser that helps 401(k) plan customers provide their employees with diversified and affordable investment options.