Beyond Target Date Funds: Managed Accounts By: Gabriel PotterMBA, AIFA® 2013.12.18

Target Date funds are a critical component of most retirement plan investment lineup. Our next series of monthly articles will focus on analyzing Target Date Funds.  Pointedly, there is already too much content to fit in a single monthly article and even with judicious editing, there may even be enough for 3 separate newsletters.  We are already trying to balance thoroughly describing a topic while maintaining our focus, but there are a number of topics tangentially related to Target Date Fund Series, which are interesting and worth knowing about, even if they don’t fit within the newsletters’ scope.

For instance, there are several ways to satisfy the Qualified Default Alternative Investment long-term requirements of the Pension Protection Act:  Balanced funds, Target Risk Funds, Target Date Funds, and Managed Accounts.  A Managed Account is a model portfolio where investment choices are offloaded to professionally managed models, but then customized based on individual employee needs.

On the plus side, a Managed Account structure within a 401k plan that is designed to be flexible, with clear upsides to engaged employees able to take advantage of the system.  For example, employees Jane Smith and John Doe are the same age and, if using a basic Target Date Fund series, would be guided towards the same investment option.  However, a thorough review determines that Jane Smith has a substantial personal ownership in a family company – a mid cap stock.  So, a managed account approach might customize Jane’s portfolio to reduce the amount of mid cap exposure within her workplace managed account to compensate for her personal holdings outside of the 401(k).

Compared to a Managed Account, a mutual fund based solution (e.g. though a Target Date fund series) is usually less expensive and easier to compare to peers – a requisite for demonstrating prudence. Further, an appropriately diverse mutual fund lineups can offer a suite of options that, in combination, should achieve an outcome commensurate with a managed account; the downside is that employees – like Jane Smith - will have to individually select their investments individually, with less customized assistance. 

Gabriel Potter

Gabriel is a Senior Investment Research Associate at Westminster Consulting, where he is responsible for designing strategic asset allocations and conducts proprietary market research.

An avid writer, Gabriel manages the firm’s blog and has been published in the Journal of Compensation and Benefits,...

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