Defined contribution plans have emerged as the dominant way for Americans to save for retirement. While many participants will eventually become clients for financial advisors, many will likely need varying forms of advice and guidance in the interim to accumulate enough savings.
The relatively small balances among 401(k) participants, though, makes the economics of providing comprehensive advice and guidance to participants difficult.
One solution receiving increased interest among plan sponsors is “retirement managed accounts,” a robo-advice solution that is available in about 50% of plans. In our latest DC Retirement Landscape survey, 88% of defined contribution plan decision-makers surveyed believed that personalized advice and guidance will improve retirement outcomes, suggesting that managed accounts would be a good option for retirees.
Although advisors have varying perspectives on digital solutions like managed accounts, they represent an attractive alternative to do-it-yourself investing approaches and a new way for Americans to accumulate wealth. Managed accounts could potentially grow the number of households with enough savings to need the help of more traditional advisors, essentially serving as a stepping stone and a positive sum game.
Additionally, we see these solutions evolving to allow advisors to take a greater role with more visibility when it comes to helping participants in such plans. As such, advisors should increasingly view the service as an opportunity rather than competition.
Retirement Managed Accounts
The term “managed accounts” has different meanings in different domains. In the 401(k) environment, “managed accounts” typically refers to a digital-first advice solution that can build personalized portfolios for participants inside defined contribution plans. They have been available for over two decades, with more than $500 billion in these solutions. They tend to be more common in defined contribution plans with more assets.
Managed account solutions, similar to other robo/digital advice solutions, offer an array of services beyond investment management. This is not too dissimilar to advisors increasing their scope of retirement planning services.
The challenge, however, is that there are not enough advisors available to provide personalized investment and savings services required by all American households, especially in an economical way given the generally low level of savings. Therefore, getting people to save more for retirement can grow the pie of households who have enough wealth to need (and want) the services of an advisor.
Since 401(k)s are the predominant way that Americans save for retirement, solutions that help participants inside those plans are a great place to start. The DC Retirement Landscape survey polled 302 defined contribution plan decision-makers and found strong interest in solutions that offer personalized services to participants. For example, 95% of plan sponsors surveyed believed that participants need access to solutions to help them determine how much to save for retirement.
One of the greatest barriers that plan sponsors have to adding managed accounts to plans — and potentially supporting wider adoption — is cost. This is one area that has the potential to change in the near future. For example, while most solutions have annual fees of 25 basis points or higher, 63% of plans would be interested in using managed accounts as the default investment if they were priced at 10 basis points or less. Recordkeepers need to offer more solutions at different price points to increase adoption among plans.
Additionally, advisors could play a greater role in this transition. The solutions generally referred to as “Advisor Managed Accounts” allow varying levels of advisor engagement, from determining the portfolio allocations to more granularly affecting decisions around the advice.
Those accounts could be an especially attractive, and economical, way for advisors to help participants in the plan create opportunities for rollovers. They will allow advisors to deliver advice to the masses at scale and will be a key actionable strategy as advisors seek to build relationships with defined contribution plan participants to pave the path for a more lucrative relationship.
The Age of Personalization
Personalized solutions and services are becoming increasingly common in all domains. One area with a great deal of current innovation, and future potential growth, is offering personalized advice and savings solutions inside defined contribution plans.
Advisors who haven’t looked into these strategies in a while should consider doing so, especially as they increasingly incorporate advisor involvement and the cost of the solutions continues to decline.
David Blanchett is head of retirement research at PGIM DC Solutions, the retirement solutions provider of PGIM, the principal asset management business of Prudential Financial.
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