The Possibilities, Pitfalls, and Potential of Managed Accounts within 401(k) Plans

By: Jeffery A. Acheson

Jeffery A. Acheson, CPWA®, CFP®, CPFATM, AIF®, CEPA®, has 40+ years in the financial services and retirement plan industries, creating a value proposition that is an exceptional and diversified integration of credentialed education, experience-based knowl­edge, and industry leadership. His fiduciary-based business model focuses on enhancing his ability to be a trusted advisor to high net worth individuals, families, businesses and their mission criti­cal employees, retirement plan sponsors and their participants through his private practice, Advanced Strategies Group. Mr. Acheson also serves as the Chief Business Development Officer for Independent Financial Partners headquartered in Tampa, FL. He volunteers within the National Association of Plan Advisors having served as the Chair of the Government Affairs Committee, a member of its Leadership Council and as President of the organization. He currently is an active member of the American Retirement Association’s Board of Directors and is Chairman of NAPA’s nonqualified plan certificate program and annual conference.

Innovate or Evaporate

In my last column [Journal of Pension Benefits, Vol. 27, No. 4, Summer 2020, p. 49] I discussed the evolution and paradigm shifts in 401(k) menu con­struction since the industry’s embryonic stage in the early 1980s. I described how this evolution was driven primarily by the thesis of three mutually exclusive groups of 401(k) participants within each plan having different interaction propensities. Those three groups are:

  1. The “Do It for Me” Disengaged Investor

2. The “Do It with Me” Engaged Investor

3. The “I’ll Do It Myself” Proactive Investor

My suggestion that a new fourth tier of 401(k) participants was emerging, has already triggered another paradigm shift and evolution within the industry that is well underway. In this column I am labeling this new cadre of 401(k) participant as:

4. The “Do It for Me” Engaged “Planner” (as opposed to Investor)

That last column concluded by describing, via the chart below, the objectives of many participants over age 50 likely finding Managed Accounts to be an attractive solution. This assumes Managed Account creators will be thoughtful in design and mindful of their fiduciary duties to avoid the damaging pitfalls I will discuss later in this column.

ObjectiveTargeted CohortSolutions(s)
Growth Accumulation< Age 50TDFs – Core
Menu – SDBA
Protected AccumulationAge 50 to RetirementPersonalized Managed Accounts
Protected DistributionRetirement to MortalityPersonalized Managed Accounts and Lifetime Income Annuities

I will use the rest of this column to expound upon the positives, pitfalls, and potential of Managed Accounts and reserve the same overview for Lifetime Income Annuities mentioned in the chart for my next column.

The Tier Four Participant: The “Do It for Me” Engaged “Planner”

This Planner mindset is more likely to be engaged, diligent in defining their personalized desired out- comes and subsequently tracking their progress toward reaching pre-planned destinations as opposed

to the Investor mindset prevalent within the first three participant tiers who typically benchmarks against “the market” or how their co-worker, friend or family member did. This outcome-oriented type of participant will be more inclined to take the time to engage in the planning process either in concert with the Plan’s advisor, if one exists, or by utilizing the technology driven on-boarding process inherent within Managed Account offerings. In terms of Behavioral Finance, these participants tend to exhibit an “Outcome Bias” as defined by Michael M. Pompian, in his article. [Michael M. Pompian, “Risk Tolerance and Behavioral Finance,” Pompian, Investment & Wealth Monitor, May/June 2017] Those with a proclivity for this bias make decisions based on the probability of achieving an outcome and not the process that leads to achievement of the outcome. In other words, “Just tell me what time it is, not how the watch works” which is an appropriate investment profile for both Target Date Retirement Funds (TDFs) and Managed Accounts.

Managed Account Possibilities vs. Target Date Funds’ Glide Path Construction

The possibilities for portfolio construction flexibility within a Managed Account can be far more robust than with the core menu or inherent within today’s typical TDF glidepath which is driven primarily by age and at best, three levels of generic risk acceptance (that is, aggressive, moderate, conservative). A Managed Account can use the same funds on the core menu or an expanded or completely different universe of investment options for portfolio construction. This flexibility allows the fund manager more tools to offset the current exceptionally low interest rate environment or hedge equity risks through the use of alternatives that a Plan Sponsor may be reluctant to put on the core menu for fiduciary risk exposure reasons.

Further, a Managed Account can incorporate dynamic asset allocation algorithms to be responsive to changing economic environments when allocating the “risk budget” for a specific participant based on their personalized goal setting and behavioral finance profile. Further perspective and insight about the success of this approach can be found in a July 2019 article from Franklin Templeton entitled “The Future of Advice” written by Jennifer Bell and Deep Srivastav. In their article they state, “Academic research incorporating Behavioral Portfolio Theory (BPT) and Modern Portfolio Theory (MPT) shows that goals-based investing is fundamentally different from risk-based investing while still being consistent with MPT.” They go on further to state:

Goals-based planning is not the same as goals-based investing as the definition of risk is different with the planning approach being focused on the probability of achieving the outcome while the investing approach equates risk to volatility.

Perhaps the most compelling aspect of their article was data pulled from a research paper entitled Dynamic Portfolio Allocation in Goals-Based Wealth Management authored by their Franklin Templeton colleagues, Sanjiv Das and Daniel Ostrov. Das and Ostrov showed the probability of goal achievement almost doubles when dynamic asset allocation strategies are utilized when compared to a standard Target Date approach and even more so against a buy and hold approach.

This success improvement is rather eye-opening but not completely surprising when we again factor in the Behavioral Finance premise that most investors are not rational and instead make ill-timed decisions driven by fear or greed as opposed to logic based on validated information and detailed analysis. One could surmise that if a Managed Account could help mitigate the detrimental aspects of a couple of common biases, then outcomes should logically improve as the Franklin Templeton research indicates. Let us look at just two biases to see if they are congruent within this assumption.

  1. Recency Bias (Pompian 2017) Over-emphasis on more recent events or results than those in the more distant past. This bias causes the investor to not harvest gains in the good times even after achieving returns in the short run above what are needed to realize their long-term goals thus increasing subsequent portfolio risk. An analogy would be playing blackjack, being on a hot streak but continuing to “let it ride” because you feel lucky. There are times, especially late in the goal achievement cycle, one simply must take some chips off the table (that is, sell high, protect gains, and buy low another day).
  2. Snake Bite Bias (Pompian 2017)  After a substantial drawdown in an investment moving to a more conservative investment to avoid additional losses. This bias typically causes an emotionally driven investor to lock in losses and likely miss the subsequent probable rebound, thereby causing them to fall behind in the scheduled pursuit of their goals.

Ultimately, a cutting-edge Managed Account offering within a 401(k) plan integrated with a developed financial wellness program can help Tier Four participants (that is, Protected Accumulation & Protected Distribution) calculate the capital they need to accumulate by a given point in time to create the income needed to satisfy their definition of financial independence through retirement. Inherent within that calculation will be an assessment of the annualized rate of return required for goal realization with an emphasis on incurring the least amount of risk possible in the process. Again, risk is defined as year-over- year performance volatility.

As stated in my last column, the elite versions of this type of managed account approach will offer:

  • Individualized strategies driven by personal preference, holistic perspective, current circumstance assessment, and volatility tolerance;
  • An evolved integration of active, passive, and alter- native investment components;
  • A flexible combination and interaction of both strategic and dynamic asset allocation decisions that proactively adapt to changing economic and investment environments;
  • Alpha realization and downside beta management driven by both the underlying investment components and the allocation strategies themselves; and
  • Benchmarking success based on achieving prob- ability-driven targeted average returns being realized while staying within historical standard deviation bell curve parameters acceptable to the individual investor (see below).

As a visualization of this last point, envision a bowling alley lane with bumpers in the gutters. Your desired rate of return is a strike right down the middle. However, whether bowling or investing, we have to acknowledge that the elusive strike is hard to come by. In bowling, the bumpers give us comfort we will never throw a gutter ball and miss the pins altogether. In investing, the bumpers are algorithms and allocation strategies that measure the standard deviation of historical performances to give us some comfort that our losses will be constrained within our comfort levels in exchange for our gains being contained. The driving factor is the rate-of-return (ROR) required to achieve our goal (that is, the strike). The higher the necessary ROR, the wider the lane of deviation must be before the bumpers kick in. With this planning approach, at least we know the ROR we are bench- marking to and why, in addition to the volatility that has to be managed through. Most participants will remain good investors as long as their experience is in line with their expectations. It is usually the surprise of the ball “jumping the bumper” that triggers bad decisions and mistakes in the investment process.

Possible Pitfalls

While the possibilities and potential of Managed Accounts are plentiful, we cannot ignore the pitfalls that will surely manifest as headwinds for first generation offerings. According to a webinar sponsored by the Retirement Leadership Forum on July 24, 2019, the hurdles to widespread adoption are:

  • Pricing: Average Managed Account cost is currently more than 40 basis points before underlying investment costs. The presentation suggested that average cost needs to come down to 20 bps before extensive utilization will occur.
  • Participant Engagement: Historically most participants falling into the first three tiers detailed in this column are not forthcoming with detailed personal information. Time will tell whether the Tier Four participants will engage any better.
  • Proving ROI:  Benchmarking performance and participant outcomes is difficult because each account is personalized by participant. This may delay managed accounts gaining a foothold as a Qualified Default Investment Alternative (QDIA) because of fiduciary oversight concerns driven by a lack of universal benchmarking data.
  • Revenue Transparency:  Lawsuits have created heightened sensitivity to revenue sharing arrangements and whether conflicts of interests exist that could lead to fiduciary liability exposure.

On a personal note, I would add two additional potential pitfalls.

  • Vulnerability of Advisor Driven Managed Accounts—The technology framework exists within the industry that enables an individual financial professional or private practice to be the investment advisor running the managed accounts using a traditional risk-based allocation approach as many advisors believe they have a “secret sauce” when it comes to managing money. The potential pitfalls inherent in this approach include, but are not limited to, the following:
  • Lack of a documented institutionalized process,
  • Lack of a documented performance history to assess, and
  • Lack of a succession plan.
  • Lack of Portability—The key to maintaining the potential and benefits of a Managed Account throughout the lifetime of the participant will be the portability of the offering to an IRA rollover upon retirement. The potential obviously exists to allow terminated and retired participants to keep their balances within the 401(k) plan currently holding their balance and offering the Managed Account. Current business practices suggest that may be the goal of many current recordkeepers and while that may be advisable, it is not always possible. As a result, portability will be key to not only widespread availability but also full life cycle utilization.


Managed Accounts done right, by the right institutions, using the right technology and communicated to the participants in the right way, hold great possibilities and potential if they can avoid the aforementioned pitfalls. When communicated, utilized, and managed to their potential, this evolutionary addition to a 401(k) menu can certainly help make better investors out of participants and retirees, thereby leading to improved outcomes in line with the realization of the pre-determined goals and objectives associated with a secure and dignified retirement. ■

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Reprinted from Journal of Pension Benefits, Winter 2021, Volume 28, Number 2, pages 46–49, with permission from Wolters Kluwer, New York, NY, 1-800-638-8437,