The Next Evolution of 401(k) Plans

Plan participants must confront many challenging questions when thinking about retirement. How much do I need to save? How do I reach that amount? What should I invest in? And who can help me figure all of this out?

We know that most participants don’t have the time, interest or expertise to manage their retirement savings on their own, yet the burden of doing so has been placed squarely on their shoulders. As a result, plan sponsors face the difficult task of helping their employees find answers to these critical questions.

To address this need, many plan sponsors are beginning to offer managed accounts to help participants receive the more personalized investment advice they are asking for. Research shows that employees enrolled in managed account services can achieve better outcomes through increased contribution rates and more diversified portfolios. As a result, they are also likely to have significantly more income in retirement. In fact, research from Morningstar Associates LLC suggests that participants receiving advice as part of a managed account service could gain as much as 40% more income in retirement. ¹

Defining Managed Accounts

The definition of a managed account can vary by application and provider. At Schwab Retirement Plan Services, we define a managed account in a 401(k) plan as including specific investment portfolio recommendations, a savings rate recommendation, ongoing professional portfolio management and rebalancing, and an estimated retirement income for each participant. Today, service providers have access to many individualized participant data points through their own recordkeeping systems as well as through payroll files from plan sponsors. Combining this information can provide 10 or more data points that can help refine the investment portfolio that a managed account provider recommends for each participant. It goes far beyond just age and can also consider salary, savings rate, account balance, gender (for longevity purposes), residential state (for tax purposes), Social Security estimates and more.

Since 2012, with the help of two national independent investment advisers, Schwab Retirement Plan Services has made low-cost managed account services available through its retirement plan platform as the intended qualified default investment alternative (QDIA). With this QDIA approach, all plan participants are enrolled into the managed account and can choose to stay in the advice program or manage their investments on their own. We discovered that when expert advice is built into a 401(k) plan so that participants start off with it and are free to opt out, 87% remain in the advice program.²

Helping More Participants

So, given the research on the benefits of managed accounts and strong participant acceptance, how can managed account adoption be expanded to benefit more participants? We believe the best way forward is to enable independent registered investment advisers (RIAs) to deliver managed accounts to retirement plans they serve. Many plan sponsors rely on their retirement plan consultant in multiple areas such as guiding plan design, recommending and monitoring plan investments, and helping them fulfill fiduciary and regulatory responsibilities. However, at the investment portfolio level, advisers historically have been limited to offering custom target-date funds (TDFs) or risk-based funds tailored to a specific plan. These are still largely one-size-fits-all strategies.

Many advisers believe in the value of personalized 401(k) advice, but they have lacked the scale necessary to serve all participants enrolled in a 401(k) plan.  With the advancement of technology, advisers can now scale their investment expertise to serve the hundreds or even thousands of participants enrolled in a single plan. As a result, employers can have their consultant serve as an RIA to design advice programs using open investment architecture that takes a much more holistic view of each participant.

A recent Schwab Retirement Plan Services, Inc., survey founds that 73% of 401(k) participants say they would be very or extremely confident in their ability to make the right investment decisions with the help of a financial professional versus only 44% who would feel that same level of confidence on their own.³ It’s clear that most participants want 401(k) advice, but, whether because of inertia or discomfort, many don’t take that first step of asking for help. Now employers can consider leveraging managed accounts as a QDIA with the help of their plan adviser to develop a retirement savings road map for each participant. The 401(k) industry is constantly evolving to help participants reach their goals. Managed accounts provided through independent plan advisers represent the next step in that evolution.

¹Based on findings from “The Impact of Expert Guidance on Participant Savings and Investment Behaviors,” David Blanchett, Morningstar Investment Management group, 2014.

²Results are as of August 31, 2015, and are based on 113 plans using built-in independent professional advice as the qualified default investment alternative (QDIA). This plan approach provides participants with a fee-based retirement savings and investment strategy, a major component of which is a discretionary investment management service furnished by independent registered investment advisers GuidedChoice Asset Management, Inc.^® (“GuidedChoice”), or Morningstar Associates, LLC, a wholly owned subsidiary of Morningstar, Inc. GuidedChoice and Morningstar Associates are not affiliated with or agents of Schwab Retirement Plan Services, Inc.; Charles Schwab & Co., Inc., a federally registered investment adviser; or their affiliates.

³2015 401(k) Participant Survey conducted by Koski Research for Schwab Retirement Plan Services, Inc. Koski Research is not affiliated with Schwab Retirement Plan Services, Inc.

The Charles Schwab Corporation provides services to retirement and other benefit plans and participants through its separate but affiliated companies and subsidiaries: Charles Schwab & Co., Inc. (Member SIPC, www.sipc.org); Schwab Retirement Plan Services, Inc.; and Schwab Retirement Plan Services Company. Schwab Retirement Plan Services, Inc., and Schwab Retirement Plan Services Company provide recordkeeping and related services with respect to retirement plans. (1115-6959)

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