An SMA for 401(k)s

Envestnet Asset Management recently launched ENVEST(k), a turnkey platform for qualified plans that allows participants with smaller account balances to invest in separate accounts.

This is good news because separate account minimums have traditionally been pretty high, with clients needing to be at least semi-affluent investors to get into them. Providers have been grappling with the question of how to offer the benefit of separate accounts to a 401(k) plan where the plan participant’s balance may only be $20,000 to $30,000, says Viggy Mokkarala, executive VP at Envestnet.

ENVEST(k) solves this problem by lumping together participants with similar balances and risk tolerances to achieve a higher overall balance that’s suitable for a separate account.

Let’s take a firm that has 100 participants in its 401(k) plan. Say 25 of the participants choose a moderate growth portfolio and each has $30,000 in their 401(k) plans. If you combine the 25 accounts, you get a total balance of $500,000, Mokkarala says, “and that’s enough to run an asset-allocated portfolio.”

Traditional retirement plans have provided participants with a selection of mutual funds, allowing them to pick and choose among those funds. But study after study has shown that most participants lack the knowledge to choose appropriately. Plan providers have been reacting to this by offering managed accounts using mutual funds, like a mutual fund wrap portfolio. ENVEST(k) “takes this concept even further by saying there are some very natural benefits in separate accounts versus mutual funds,” Mokkarala says. “We’ve put together asset allocated portfolios using institutional-class money management firms, and are offering those in the retirement space.”

ENVEST(k) uses Envestnet’s Multi Manager Account portfolios, actively managed mutual funds, and ETFs, and is designed for defined benefit and defined contribution plans, like 401(k)s and 403(b)s. Mokkarala says a managed portfolio gives investors peace of mind because, unlike mutual funds, they are being “continuously maintained and monitored” for plan participants.

Separate accounts are gaining in popularity because they tend to be less expensive than mutual funds, and are more tax efficient. According to fund guru John Bogle, chairman of Vanguard, the average domestic actively managed no-load mutual fund has an expense ratio between 140 and 150 basis points, Mokkarala says. “If you were to take that number before you add any costs of trades, or costs of asset allocation and modeling, you will find ENVEST(k) offers a very competitive solution,” he says.

The cost of the ENVEST(k) platform plus investment management fees are 80 basis points for aggregate plan assets up to $5 million, Mokkarala says. When plan assets exceed $20 million, the fee drops to 60 basis points. Envestnet also levies a “small trading fee” as well as a custody and clearing fee, which varies depending on plan assets. There are also third-party administrator fees, which also vary depending on plan assets and number of participants.

When Mokkarala fields queries from advisors about how ENVEST(k) compares to other providers, he compares their current costs to fees levied by Envestnet. “We usually compete very effectively,” he says.