retirement

New retirement trend: Managed 401(k) plans

Roadblocks to success

Despite the upside potential of the managed 401(k), a few roadblocks remain to widespread adoption of this option.

Whether it offers a participant-driven 401(k) plan or a managed plan, the employer has a fiduciary duty to put the interests of the plan participants ahead of its own. With the managed 401(k) plan, fiduciary responsibility for investment decisions shifts to the investment manager, but the employer is still on the hook for choosing and monitoring the investment manager.

Kitces says many employers are reluctant to offer these plans because taking an employee's decision-making ability away from him exposes the company to increased liability if investment choices go south.

"We have the right to shoot ourselves in the foot," Kitces says. "But if my employer shoots me in the foot, I'll sue him."

For that reason, employers have a strong incentive to leave employees in control of their 401(k) investment decisions.

"If employers allow employees to manage the 401(k), the employer has virtually no liability," he says. "If you were an employer, which (option) would you choose?"

But the biggest obstacle to the success of managed 401(k) plans is employee reluctance to give up control of investment decisions, Kitces says. That's true despite the fact that the average person tends to make bad investment choices when left to his own devices.

"Investors need to get more comfortable delegating control of their investments, and frankly, I'm not sure that's going to happen at any time in the foreseeable future," he says.

Itzoe believes proper education can remove this roadblock.

"I've also found most people, when presented the advantages, prefer having their account managed for them," he says.

Other obstacles

Even when such barriers are overcome, hurdles remain. Kitces says companies that take a managed 401(k) approach sometimes pool all employee money together and invest it in the same way, regardless of individual goals, time horizons and levels of risk tolerance.

Pooling money helps eliminate inefficiencies and reduces overall costs. But it also has drawbacks for the individual employees, he says.

"You lose the decision about what risks you do and do not want to be exposed to," he says.

In other cases, managed 401(k) plans are more closely tailored to an individual's needs and preferences. However, investors likely will pay a price for such hand-holding. Reports suggest the fees for services such as those provided by firms can range up to 0.6 percent. And that comes on top of standard fund fees and 401(k) costs.

Itzoe says "the vast majority of people" are likely to balk at such extra fees.

"Even though this expense will probably earn them higher returns in the aggregate by helping them avoid account mismanagement, (it) is a tough pill to swallow," he says.

Wohlner says he does not see much of a downside to using a managed 401(k) approach, although he adds that, "I'm not saying it's right for everybody."

He urges investors -- individual and institutional -- to be aware of fees and to do their homework when choosing a managed 401(k) custodian.

"The same questions you would ask of a financial adviser, you need ask (of a custodian)," he says.

Maximize your 401(k), and retire in style No matter where you are in your career, be sure to make the most of your workplace retirement plan.

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