Tim Friday, Institutional Services Group CEO and president with Pittsburgh-based Mid Atlantic Trust Company, used his teenage daughter’s Snapchat social media habits to make a point about change, and how it related to products inside 401ks and similar DB plans.
Friday hosted a session at Fi360’s annual conference on Thursday in San Diego, titled “The New World of Separately Managed Accounts Within a 401k Plan,” which touched on the current SMA landscape, why they’re increasingly used in 401k plans, and what to watch for if 401k advisors decide to implement an SMA strategy.
“Today, more and more advisors and sponsors are making them available as default options with the 401k,” Friday explained. “And there are fewer hurdles in doing so than there were in the past.”
Overall, minimum requirements to invest in SMAs went from a traditional amount of $250,000, down to as little as $25,000 in the individual wealth management space. In 401ks, the minimums were reduced further, from $250,000 down to zero.
“The reasons SMAs are growing in popularity is that they offer greater transparency with lower fees, the ability to finetune the investments over and above a publicly stated mutual fund objective, and the ability to own the actual underlying securities rather than pro-rata shares,” he said.
Historically, he added, if advisors wanted to create a unique strategy or use the investment intelligence of a third-party manager within a 401k application, they could, in fact, create a “quasi” model strategy using the core line-up of investments being offered to participants as a whole.
Today, the benefits of including an SMA in a retirement plan menu include:
- The ability to sit alongside a core mutual fund lineup.; the same fund “instance” in a core lineup as well as an SMA strategy.
- Participants can move from the core lineup to the SMA whenever they like.’
- Payroll contributions for participants can automatically be directed into an SMA strategy.
- Advisors can set a strategy at a global level and apply it to multiple plans across multiple record keepers.
- Liquidity, rebalancing, and risk tolerances can be set to automatically adjust.
- Investment flows can be easily monitored with a dashboard.
And what should advisors look for when implementing an SMA strategy in a 401k?
“Ask yourself how the performance will be monitored, either at the at the plan or composite level, or through a data feed in the recordkeeping system. Also, who will create the proper fee disclosures for the strategy, especially for QDIAs and 404a-5 participant disclosure, both initially and annually.”
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
It really helped when you said SMAs are becoming increasingly popular because they provide better transparency with reduced costs, the opportunity to finetune investments beyond a publicly stated mutual fund aim, and the option to hold actual underlying securities rather than pro-rata shares. I have a cousin who is doing a research paper this should help him, I’ll share it with him. Thank you for the information about separately managed accounts.