US - The future of 401(k) plans in the US could be centred around the introduction of ‘managed accounts'.
The managed accounts, which are currently being piloted by several small US pension plans, act as a professionally managed default fund within the existing 401(k) structure and are aimed at individuals who do not want to make their own asset allocation and manager choices.
As plan sponsors battle with educating employees regarding investment direction, most plans find that employees are either unwilling or unable to make informed investment decisions.
Christopher Jones, executive vice president at California-based employee benefits firm Financial Engines, estimates that only around 5% of Americans are “able or willing” to make investment decisions, despite ongoing 401(k) education programmes. This, combined with the recent downturn in equity markets, has left many plan sponsors facing employees who feel confused and betrayed.
Demographic changes and employee mobility also mean that there will be no return to the glory days of defined benefit plans for many plan sponsors across America, leaving a solution to be found within the 401(k) system.
Jones noted that the new managed accounts will become a “substantial part of the solution.”
“It is one solution that does not require the active participation of plan members,” he added.
“People in the US are coming to the conclusion that education is not enough,” he noted, sentiments that Herb Farrington, senior advisor, employee benefits at Unocal’s pension plan agreed with.
“Education is probably not enough. When you look at asset allocation pie-charts, these don’t change. There are huge levels of inertia; 50% is still in company stock. Managed accounts are very probable down the road,” he said.
“I went round and asked 300 employees if they knew how to calculate their retirement benefits – and that is a simple calculation – and only 1% did. That is after a full education process,” he added.
Todd Creasy, director of compensation, benefits and retirement at Rogers Group said: “We have even tried one-on-ones, right down to managers becoming proponents of the retirement plan. It is tough educating people. We have tried online and call centres.”
But not everyone agrees there is a need for managed accounts.
“We have made great strides in education. I do not think there is much difference between 401(k) plans and professionally managed defined benefit plans in terms of performance over the last two or three years. The downturn in the market has effected everyone – both professionally and personally,” said Mark Kordonsky, principal of global retirement consulting at Buck Consultants.
According to Jones at Financial Engines, the liability - which is so crucial in the US - passes from the plan sponsor to the investment manager when managed accounts are used. This could be a real driver for plan sponsors to introduce managed accounts, he added.
“Previously, plan sponsors thought it risky to advise. Now they think it riskier not to advise. With managed accounts the liability is with the investment manager. It is similar to a defined benefit fund hiring an investment manager. The responsibility is based on prudence,” said Jones.
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