More clients may have access to managed accounts through their 401(k) plans today than in years past, but half of plan investors don't understand how these accounts actually work, according to a new study by Fidelity.
That understanding gap may offer some advisors and plan sponsors an opportunity to educate clients.
Indeed, 401(k) plan investors can expect to see increased education on what professionally managed accounts are and how to best use them in 2016, says Sangeeta Moorjani, senior vice president of Fidelity workplace managed accounts.
"What we see from our employer base that recordkeep at Fidelity is they continue to add managed accounts because they think it adds a more balanced plan design," Moorjani says.
In its research, Fidelity found that employers use managed accounts to retain and attract employees. The accounts also "play an important role in helping employees be better prepared [for retirement]," Moorjani says. More than half of employers with Fidelity felt that managed accounts were a great retirement tool for their employees.
In the past four years, the number of employers offering managed accounts more than tripled but Fidelity found that 49% of individuals don't understand how managed accounts work.
"That becomes a barrier," Moorjani says. "Once those benefits are explained, 54% say this is a very relevant concept for [them]. Fifty-two percent say 'I would benefit from that service.'"
Many employees are confused by the number of choices on an investment menu.
"When someone can break it down for them and help them understand the benefits it is very helpful to them, especially in times of market volatility like we are in now. What employers have seen is people are extremely anxious," she adds.
When people are anxious, they make extreme decisions like being overly aggressive in their investments or overly conservative.
"That's where professional help and guidance is seen as a key aspect for employers to help manage these turbulent market volatility times," Moorjani says. "We see more and more employers in times like this reaching out to employees about how best to use plan options and why managed accounts would be a good way to ease the ride, so to speak."
When employees are asked what the biggest benefit is of using managed accounts in their retirement plan, 48% said that managed accounts are constantly monitored by a professional.
"I like to think of managed accounts as shock absorbers. What's happened the last [few] weeks in the market, if your account is professionally managed you are not seeing the swings. You may not get the best top upside but you won't get the downside either," Moorjani says. "They do a great job of managing the risk an individual would experience through volatility and it is great that the message is resonating with employers and employees of the benefits of a managed account."
Education is the key, she says, recalling a Fidelity client with 70,000 employees that wanted to raise awareness around retirement readiness and managed accounts. Fidelity worked with the company through online channels, intranet mailings, at-home mailings and more. Not only did the number of employees adopting managed accounts go up, but even people who didn't enroll in a managed account increased their retirement plan deferral rate to start saving more, she says.
"Managed accounts smooth the ride and keep people even. Staying even is the best way. As history has taught us, it is not good to be rash," says Moorjani.
Paula Aven Gladych is a contributing writer for Employee Benefit News, a SourceMedia publication.