Retirement target-date funds or managed accounts? Target-date funds are often employers’ default choice — and it makes sense why. They’re easily understood, easy to use and often have low fees.

But that doesn’t necessarily make target-date funds the best option for plan participants.

Target-based funds automatically rebalance asset allocation based on a target date of retirement. Seven out of 10 retirement plans that use auto enrollment also have target funds as the default investment choice.1

With managed investment accounts, a professional money management service selects and package funds for an individual’s portfolio, based on his or her needs. In 2019, 37% retirement plans offered managed accounts and 63% of participants had access to them, but only 5% of participants used them.2

Plan sponsors and participants may be overlooking an opportunity to improve their retirement outcomes through managed accounts, as individuals may have different investment criteria than the number of years before they retire. Managed accounts allow for a more precise alignment of investments to meet changing personal objectives. And often, managed accounts start out as target-based funds before transitioning to a managed fund.

The advantages of managed accounts

Plan sponsors may not know how managed accounts are differentiated from and can be more advantageous than target-date funds. Here’s six ways managed accounts can pay off:

  1. They provide holistic investment advice: With a managed account, a team of investment advisors use information from plan participants about their circumstances and desires to create a portfolio. The team also advises participants on saving goals and their ideal retirement window, based on their changing conditions.
  1. Managed account advisors develop strategies for post-retirement. Too often, plan participants don’t have a strong investment strategy for after they retire. In a managed account, advisors guide participants on post-retirement investments and tax-efficient withdrawal strategies.
  1. Individual risk preferences are central to managed accounts. Target-date funds assume a risk profile based on age. But with managed accounts, participants’ investment mix is matched to their individual risk preferences — and they can adjust the portfolio as risk preferences change.
  1. Providers build on existing options. Managed accounts providers tend to build individual member portfolios using plan options already in place. In doing so, they don’t have to add investment options or provide additional research or investments.
  1. There is no “set it and forget it” option for managed accounts. In a managed account plan, providers monitor and adjust portfolios as plan investment options and participants’ goals and rebalance accounts regularly to keep them on track.
  1. Deferral rates tend to be higher. Plan participants may be more likely to put money into retirement in a managed account. One study found that when a managed account is the default choice rather than a target-date fund, employees save 2% more of their salary than when target-date funds are the default.3

While managed accounts have many advantages, there are some drawbacks. Fees for managed account services are higher than fees for target-date funds, although improved performance and better alignment to goals can make up the difference. In addition, because there are no comparable benchmarks to a managed account, it can make comparisons difficult (even with target-date funds). There’s also a limited number of managed account providers, so it can be difficult to perform proper due diligence and compare providers.

Evaluating managed account providers

Costs — including advisory fees and investment-related expenses — should be a major focus when evaluating a managed account provider. In evaluating providers, plan sponsors should ask if the provider integrates with the plan recordkeeper. And the plan sponsor should inquire about particulars on data collection and use: Good data collection and solid data strategies should guide investment mix.

In any evaluation, plan sponsors should include investment experts. Not only will an expert provide insights into providers’ approach to asset allocation but will help plan sponsors evaluate the prospective partners’ experience and qualifications as an advisor — and, if needed, grade a provider’s history as a fiduciary.

HUB Retirement and Private Wealth employees are Registered Representatives of and offer Securities and Advisory services through various Broker Dealers and Registered Investment Advisers, which may or may not be affiliated with HUB International. Insurance services are offered through HUB International, an affiliate. Consult your financial professional for additional information about the provision of specific securities, investment advisory and insurance services by each broker‐dealer and investment adviser.

1 Commonwealth, “The Benefits of Managed 401(k) Accounts: Are They Real?” August 27, 2019.

2 Vanguard, How America Saves 2020, June 2020.

3 Morningstar, The Impact of the Default Investment Decision on Participant Deferral Rates: Managed Accounts vs Target-Date Funds, October 16, 2016.