Just back from the NAPA 401k summit and all the talk seemed to focus on managed accounts in 401k plans. Taking it a step further, advisor managed accounts in 401k plans was brought up repeatedly. There is a tendency in the 401k space to chase after the new shiny object.
Chasing the new shiny object makes sense to some extent. As plan sponsor, you don't want to miss out on something valuable for your plan participants. And yes, there is a certain element of keeping up with the Joneses in this. Woah be it to you if your 401k is the only one missing the latest and greatest innovation. Talk about an awkward moment at a Plan Sponsor Cocktail Party!
My thinking though is to apply the Prudent Process before chasing anything at all. Let me explain. As I mentioned in my last article, managed account seek to address this by looking at a variety of employee data points and then create a custom blend of investments for the employee. This blend changes over time as an employee's life changes. For example, two 57 year olds could vary in terms of how much they have saved over time, when they want to retire (if at all!), what the rest of their investment portfolio consists of, etc. To that end, the individual employee's 401k account should also vary.
Advisor managed accounts are just that. They are managed accounts in a 401k but the plan advisor is the one creating the models and custom blends of portfolios. Yes, it is a lot of work but it can be worth it to certain plan participants.
Applying the Prudent Process, Step One is called "Identifying the framework" but I think of it more as "What is the need we are trying to address?". Are employees wanting more personalized 401k investment choices? Are there vast disparities between employees of the same age? Are plan participants financially sophisticated but can't spend the time and effort customizing their own portfolio because they are usually working during market trading hours? What is the need and how do managed accounts seem to address it...or not?
Step Two: Gather information. Assuming that managed accounts are still something you want to pursue, gather information. Does your 401k provider offer managed accounts? Can your 401k advisor offer them? What other companies offer these types of solutions and do they integrate with your 401k platform? Gather the information and set up a comparison matrix.
Step Three: Using your participant needs from Step One, create a comparison matrix to evaluate each offered solution. These might include what asset classes are available, fees being charged, performance, etc. As Plan Sponsor and fiduciary, you should also evaluate the solution provider(s). The last thing you need is to come up with a solution only to find you have fiduciary liability on your hands.
Step Four: Make a decision and document. I recently had one of my business partners close up shop on an investment I use in every 401k plan. The amount of time I spent on Step Three was something else. But Step Four? I wrote and rewrote my decision email numerous times as I tried to clearly explain why I am doing what I am doing. I also tried to anticipate sponsor and participant questions. This is no different. Make your decision based on Step Three and document that decision in excoriating detail. Yes, I do mean excoriating. Make sure you show both the positives and negatives that you looked at and over-document. In the event of someone questioning the decision, you must show that you followed the Prudent Process and the Fiduciary Standard as you sought to do right by your plan participants.
Step Five: Monitor and Review. Are employees using the new managed accounts program? What is the feedback from the participants? Assuming all is well, you should still keep an open mind about other providers out there. You might even RFP this part of the 401k. Making the decision in Step Four is just the beginning.
The Parting Glass
You may still chase the new shiny object but at least you can demonstrate to anyone who asks that you followed a Prudent Process in arriving at your decision and you continue to do that through Step Five. Not much to ask of you, no>