I hope you are contributing to your 401(k) plan at work. If you are not now is the time to start. If your employer offers a company match it is very important to contribute at least the amount that the company will match. Otherwise you will be leaving free money and an instant positive return on the table. While everyone does not have a financial planner or maybe the assets to require one it is never a bad idea to at least consult a fee only planner to help develop a financial plan and a retirement plan for your 401(k). In instances where you are not comfortable deciding what investments you should be investing in many plans offer managed funds such as target dated funds. While these plans may make investing easier and more of an automated function they do come at a higher cost in the way of fees.
While there may seem to be advantages for managed accounts within 401(k) accounts these management services can offer widely different strategies. In a recent study by the government it was determined that eight managed account providers represented about 95% of assets under management. With such little in the way of choices for managed accounts there really are not that many choices for 401(k) participants. But these eight firms do offer a fairly wide and diverse group of options using different investment options and asset allocation and rebalancing options. But this does not ensure that the management company is living up to its fiduciary responsibility.
While not every managed account offers personalization some do but the benefit often goes unused. Two of the eight used personal information on the participant to allocate the account’s assets. The firms had the participant’s age, gender, income, account balance and savings rate. The good news is the majority of the manager’s required additional information such as risk tolerance and spousal assets. The majority of plan participants do not provide any of this information to the managers of the plans thus rendering the manager at a disadvantage. What does this mean? It means that you as a plan participant are not receiving the full benefits of what you are paying for in the way of fees. If the information is not provided then the plan participant will most likely be invested in something that is similar to a target dated fund.
One thing that participants need to always consider is that there is an inherent conflict of interest between the plan manager and you the participant. It is not always in the best interest of the participant to keep their funds in the plan once they have retired or leave the company. But it is in the manager’s best interest to keep the participant’s funds in the account. In these instances it is wise to do your own research and decide what is best for you and your funds.
As with any activity that is actively managed it will cost you a fee. The fees for managed funds are higher than those for passive managed funds. If you are able to and have the time it may be more advantageous for you to select your own investments which is something I advise in the event your plan does not offer management of funds. And I tend to advise people to avoid target dated funds as I find them to be more conservative than what a person really needs. Many people do not have the assets or need for a full time financial planner so managed 401(k) plans are a good option provided you take full advantage of the services and benefits that are offered.
While managed 401(k) plans do cost more I see advantages in their services over say a simple target dated fund. But as mentioned earlier it is very important for you as the participant to provide all of the required information so you can have a manager that is able to provide you the best service that is possible. Why pay for an actively managed fund if you do not utilize it to the fullest. But as with any investment it is not good enough for you to have a manager looking over your investments it is very important that you do understand them enough to question the manager.