Vanguard's recent move to offer a Managed Account Program to retirement plan participants gives a major push to the recent industry development.

Other large firms who, like Vanguard, have the scale and resources necessary to test new ideas, have taken the initiative on managing retirement savings for participants. These providers have set up plan options that allow workers to turn the investment selection process over to the provider.

Two programs similar to Vanguard's new one are Wachovia's AdviceTrak and Merrill Lynch's AdviceAccess.

With managed account programs, plan participants sign up once and, for a fee, they never have to worry about evaluating their investment options or rebalancing their portfolios. This is good news for participants, many of whom sign up for 401(k) plans at work and then completely ignore their accounts ever afterwards.

It is also good news for retirement providers, who have been grappling with the rising demand for investment advice. Advice is expensive to provide, and there has never been any agreement in the industry on who should pay for it. Tensions have sometimes run high between companies who provide free advice to participants and those who think it is more effective to charge for the service.

Web-based programs held out the promise of providing participants with high quality investment advice at a manageable cost, but utilization rates have been relatively low, with some industry professionals saying only three to five percent of participants who have access to online advice actually using it on a regular basis.

The managed account programs allow providers to recoup the costs of creating personalized investment portfolios without charging sponsor more by applying asset-based or flat fees directly to participant accounts.

If such programs catch on, they could significantly increase profit margins for retirement providers.

This could make recordkeeping more viable for providers that offer it. The big problem for fund firms in the 401(k) market has been that retirement plan recordkeeping, a low margin business, pulls down profits from high margin asset management. That is why there has been such a big move to outsourced recordkeeping, despite the fact that the recordkeeper is a sort of gatekeeper for plan assets.

The programs could create an additional hurdle for investment-only providers looking to gather assets in the retirement market. Funds used for the managed account option tend to differ from a plan's core funds. Merrill's AdviceAccess uses the investment options within retirement plans, but Wachovia's AdviceTrak uses 12 institutional funds which are selected by a Wachovia committee and not the plan sponsor.

The fees Vanguard charges will likely define the lower pricing limit for the market. On the Managed Account Program, their fees will range from 40 to as low as 10 basis points. Vanguard's average expense ratio is 25 basis points, so the total cost for the managed account should rarely go above 65 basis points.

Wachovia's AdviceTrak also charges varying fees; theirs go up to 130 basis points, with all expenses included.

Each program provides customized asset allocation based on personal information, but the financial models underneath are different for the three programs.

Vanguard uses processes developed by Financial Engines, Inc. The huge fund firm has been a key client for Financial Engines since picking up their investment advisory services in June 2001. The second largest 401(k) provider took their web-based advice and started offering it to clients free of charge. Almost 200 of Vanguard's plan sponsors deliver Financial Engines to their participants.

Cementing this relationship by providing the processes for managed accounts at Vanguard is a major positive development for Financial Engines.

Wachovia uses Morningstar financial models, customized for their clients. Merrill Lynch uses models developed by Ibbotson Associates.

Participants in Vanguard's program receive quarterly account statements and telephone access to Managed Account Specialists.

Wachovia also provides telephone access to account help, which is integrated with their general call center. Keith Sykes, a product manager at Wachovia, said they added about ten employees at the call center to cover the AdviceTrak calls, which he described as "minimal."

Vanguard's managed account option will be included in the One Step program, which automatically enrolls employees and handles everything about their account. It will also be offered as a separate plan option for sponsors that don't use One Step.

Wachovia rolled out its system last April and had the first plans up and running on it in July. Currently, 214 plans have adopted the program and there are 147 live plans. Wachovia had set a target of 60 plans in the first year, so they were pleased with the response.

At the participant level, numbers are lower than some would expect, although the heavy launching is diluting them somewhat. Sykes, said utilization rates were "right around six percent" and close to their seven percent first year target. "After three years we think we can have 18 and 21 percent adoption," he said.

Fidelity launched a similar product, its Retirement Plan Manager, as a pilot in March 2003 and is now offering it to all plan sponsors.

A Fidelity spokesperson said "as of March 2004 it looks like approximately four or five percent of the eligible employees are using the Retirement Plan Manager."  

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