Are Managed Accounts in Your 401(k) Worth the Fee?

Managed Accounts: A Great Product, For The People Selling It

The pitch is professional management tailored to each participant. Follow the fee and you’ll often find a questionnaire nobody filled out, a fund lineup that contradicts everything your recordkeeper told you last year, and 0.5% going somewhere that isn’t your employees’ retirement account.

Jason Brady, AIF — Mission Retirement Consulting | San Diego, CA

I’ve been in the retirement plan industry since the late 1990s. I’ve watched a lot of products get invented, packaged, and sold to plan sponsors as participant benefits. Most were fine. Some were genuinely useful.

And a handful were so elegantly structured to transfer money from participant accounts to the vendor chain that I have to admire the architecture even as I’m telling you to take a hard look at what you’re paying for.

Managed accounts fall into that last category.

The Pitch: Finally, Someone to Actually Manage This

The managed account pitch is genuinely appealing, and I want to give it full credit before I start following the money.

Most 401(k) participants are not sophisticated investors. They enrolled because HR told them to, picked a contribution rate they never revisited, and clicked on a target-date fund because the name had a year close to when they planned to retire.

That’s not a character flaw. It’s what happens when you ask non-professionals to make professional investment decisions without training or support.

The managed account pitch walks in and says:

What if you didn’t have to do that?

What if a professional—or at least a professional algorithm—handled the allocation for each participant individually, accounting for age, risk tolerance, salary, outside assets, and proximity to retirement?

What if the plan could actually act like it had an advisor for every employee?

That’s a good pitch because it describes a real problem.

The question is whether the product actually solves it.

The Turn: Follow the 0.5%

Here’s the first thing that should catch your attention.

The same person who sat across from you during plan design—or during the last review when you asked about simplifying your fund lineup—probably told you that a curated menu of 12 to 16 funds is plenty.

Prudent, even.

Easy for participants to navigate. Reduces decision paralysis. Easier to monitor and document.

That is good advice. I’ve given it myself.

Then managed accounts get introduced.

Suddenly the recordkeeper needs 35 to 45 funds to make the service work. The algorithm requires asset-class coverage your lean, defensible lineup can’t provide. You’ll need a mid-cap value fund. International small-cap. TIPS. Maybe commodities.

The same person who praised your disciplined menu is now explaining why the managed account service needs more ingredients.

What changed?

The fee structure.

Managed accounts typically add another 0.25% to 0.50% of assets. The fee is deducted directly from participant accounts and is largely invisible to people who don’t read their quarterly statements carefully.

A plan with $10 million in assets and 60% managed account adoption can generate $15,000 to $30,000 a year in additional revenue.

The recordkeeper and managed account provider—often the same organization or a revenue-sharing partner—split that revenue.

The expanded lineup isn’t necessarily for participants.

It’s the raw material the algorithm needs to look like it’s doing something worth the fee.

The Question Nobody Asks

Before adding a managed account fee, ask a simpler question:

What problem is the target-date fund failing to solve?

For most participants, a target-date fund already adjusts risk over time, diversifies globally, rebalances automatically, and requires almost no effort from the employee.

That’s why target-date funds became the default investment option in most plans in the first place.

A managed account is supposed to improve on that.

Sometimes it does.

But not always.

Take a typical participant: 35 years old, earning a salary, contributing to a 401(k), no pension, no rental properties, no significant outside assets.

What exactly is the managed account doing that the target-date fund isn’t?

For many participants, the honest answer is: not much.

The managed account provider will point to personalization. That’s fair.

But personalization only works if participants provide meaningful information.

Most don’t.

If the allocation ends up looking remarkably similar to the target-date fund sitting next to it on the investment menu, then the fee isn’t buying expertise.

It’s buying complexity.

Meet Trevor

Trevor is 27 years old.

He has a CFA he’s very proud of.  In fact the record keeper or advisory shop that hired him are very proud of him for earning this prestigious credential.

However he is not, in any meaningful sense, managing your participants’ money.

This is not a knock on Trevor personally. Trevor is probably fine.

The problem is structural.

The “professional management” in managed accounts is almost entirely algorithmic.  No matter how many credentials these vendors throw at it.

A questionnaire gets filled out—or more often, prefilled using demographic assumptions when the participant ignores the invitation—and the algorithm allocates accordingly.

Trevor is not reviewing 847 participant accounts.

Trevor’s firm built a model, applied it at scale, and charges participants a percentage of their balance for the privilege of being a data point inside it.  This sounds almost exactly like a target date fund when you start to peel it back.

When the algorithm reweights a 34-year-old’s account from 78% equities to 74% equities because their salary band changed, that isn’t worth 40 basis points.

It’s a rounding error dressed in a CFA certificate.

The Questionnaire Nobody Filled Out

Managed accounts are supposed to account for outside assets.

If a participant has a pension, a spouse’s 401(k), a brokerage account, rental income, or other significant resources, the managed service should incorporate that information into the allocation.

That’s the entire point of personalization.

It’s what distinguishes the service from a target-date fund that only knows your birth year.

In practice, participation is often far lower than the marketing materials imply.

Many participants never complete their profile.

Others fill it out once and never update it.

The algorithm is frequently working with assumptions, defaults, or stale information.

The personalization is often far less personal than advertised.

And that’s important because the fee remains fully personal.

The Process-Not-Proof Architecture

ERISA doesn’t require investment options to perform well.

It requires fiduciaries to follow a prudent process in selecting and monitoring them.

That’s a legitimate legal standard.

Outcomes are unpredictable.

Process is what you can control.

It is also the most useful piece of architecture the managed account industry has ever found.

When you offer managed accounts, you’ve offered a documented, third-party, professionally managed investment service.

The box is checked.

The fee is defensible because somebody with credentials approved the methodology.

The product doesn’t have to outperform the target-date fund sitting next to it.

It simply needs a documented process.

And it always has one.

The structural tell is this:

The feature that benefits participants—personalized allocation—requires participant engagement.

The feature that benefits the vendor—the fee—requires nothing.

When the revenue mechanism is automatic and the value delivery is optional, you should pay attention.

The Honest Valve: When It Actually Earns the Fee

Managed accounts can absolutely provide value.

There is one participant profile where they often earn their keep.

Someone within five to ten years of retirement.

Someone with meaningful outside assets.

Someone with a pension, a spouse’s retirement plan, significant savings, concentrated stock holdings, or other complexities.

And most importantly, someone who will actually complete and maintain their profile.

For that participant, a holistic allocation may be meaningfully better than a target-date fund.

The problem is that this participant is usually the exception, not the rule.

Yet the service is marketed broadly and often priced accordingly.

Like most financial products, managed accounts aren’t inherently good or bad.

They’re tools.

The question is whether you’re paying for a tool most participants actually need.

The Verdict: You Authorized This Fee

When managed accounts were introduced to your plan—whether at setup, renewal, or during a vendor presentation—someone said yes.

That yes added a fee.

Your fiduciary responsibility isn’t to determine whether the service sounds good.

It’s to determine whether the fee is reasonable relative to the service being delivered.

For many plans, the honest evaluation looks something like this:

The majority of participants have incomplete profiles.

The algorithm is operating on assumptions and defaults.

The allocation may not be meaningfully different from a target-date fund despite costing significantly more.

The fee is 0.25% to 0.50% on top of underlying investment expenses.

And the organization administering the plan often profits from the arrangement.

A participant with a $100,000 balance paying an additional 0.40% managed account fee is paying roughly $400 per year.

At $500,000, that’s $2,000.

At $1 million, it’s $4,000.

The question isn’t whether those fees are disclosed.

The question is whether the service is worth them.

None of this means you have to remove the feature.

It means you should evaluate it.

Document what you found, what you decided, and why.

If you keep it, keep it because you’ve concluded it serves your participants.

Not because nobody has asked the question yet.

“Nobody asked” is not a fiduciary defense.

It’s just the window before somebody does.

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If nobody in your vendor chain has ever raised this question, that alone is worth thinking about.

I’m a fee-only, independent retirement plan advisor in San Diego. I don’t receive revenue sharing from recordkeepers, I don’t sell managed account services, and I don’t have a reason to tell you your plan is fine when it isn’t.

If you’d like an independent review of your plan’s fees, investments, and service structure, reach out.

The conversation is free.

Jason Brady, AIF
Mission Retirement Consulting
(619) 942-4510