401(k) Managed Account vs. Unmanaged: Which to Choose?

Employees with a 401(k) plan must decide how their contributions are invested. The choice is whether to personally direct their investments or to delegate that responsibility to a professional service for a fee. This decision influences the potential growth of their assets and the level of personal involvement required.

Understanding the Unmanaged 401(k) Account

An unmanaged 401(k), or self-directed account, is the standard option in most retirement plans. The employee is responsible for choosing investments from a menu of options provided by the plan. This approach gives the account holder full control over their retirement portfolio.

For those who choose this path, there are two distinct strategies. The first involves building a custom portfolio by selecting from the various mutual funds and exchange-traded funds (ETFs) available. This requires the participant to research different funds, understand their objectives and risk levels, and construct a diversified mix that aligns with their financial goals.

A simpler alternative is the use of a Target-Date Fund (TDF). A TDF is a single, diversified fund designed as a “set-it-and-forget-it” solution. An employee selects a fund with a year that corresponds to their expected retirement date, and the fund’s manager handles all underlying investment decisions.

The core mechanism of a TDF is its “glide path,” which dictates the gradual shift in the fund’s investment mix. When the target retirement date is far in the future, the fund will hold a higher percentage of stocks for growth potential. As the date approaches, the fund becomes more conservative by increasing its allocation to bonds to help preserve capital.

Understanding the 401(k) Managed Account

A 401(k) managed account is an optional, fee-based service that offers professional investment management for retirement savings. Unlike the self-directed approach, a managed account service takes on the responsibility for all investment decisions. This option is for individuals who prefer to delegate these tasks to a professional.

When an employee enrolls in a managed account service, they provide detailed personal financial information. This includes their age, income, target retirement date, risk tolerance, and sometimes outside assets. The service, often powered by a robo-advisor, uses this data to construct a personalized investment portfolio from the funds available within the 401(k) plan.

The service extends beyond the initial portfolio construction. The managed account provider continuously monitors the portfolio and makes adjustments based on market conditions and changes in the participant’s life. This includes automatic rebalancing to ensure the asset allocation remains aligned with the individual’s long-term retirement goals.

These services are provided by a registered investment advisor who acts as a fiduciary, meaning they are obligated to act in the participant’s best interest. The management is automated and tailored to the individual, distinguishing it from the one-size-fits-all model of a Target-Date Fund.

Comparing Key Factors

Cost

A distinction between unmanaged and managed 401(k)s is their cost. In an unmanaged account, the costs are the expense ratios of the selected funds, which cover the fund’s operating costs. Low-cost index funds can have expense ratios as low as 0.05%.

A managed account adds an advisory fee for professional management, which ranges from 0.20% to 0.85% of the account balance annually. This fee is paid on top of the underlying fund expense ratios.

Control and Personalization

With an unmanaged account, the participant maintains full control to select funds, set asset allocation, and make portfolio changes at any time. This approach offers high flexibility for the hands-on investor.

Opting for a managed account means ceding direct control in exchange for a personalized portfolio. The service considers factors like risk tolerance and other savings to create a custom strategy. This differs from a Target-Date Fund, which bases its strategy only on the target retirement date.

Time Commitment and Required Expertise

The unmanaged approach requires engagement from the participant. Building a custom portfolio involves researching funds, monitoring performance, and periodic rebalancing. Using a TDF reduces this burden but still requires initial due diligence to select the right fund.

A managed account requires minimal time from the investor after the initial setup. The service handles all portfolio construction, monitoring, and rebalancing. This delegation of responsibility is a benefit for those seeking to simplify their financial lives.

Key Considerations for Your Choice

Choosing the right 401(k) management style is a personal decision. The best choice depends on how you weigh factors like cost, control, and convenience.

First, consider your comfort level with making investment decisions. If you understand financial markets and are confident in your ability to build and manage a portfolio, the control of an unmanaged account may be appealing. If selecting funds and rebalancing causes stress, the guidance of a managed service could be a better fit.

Next, evaluate your sensitivity to fees. Managed accounts have an additional advisory fee that pays for personalized service but will reduce your net returns over time. You must decide if professional management is worth the extra cost compared to a self-directed account, especially one using low-cost funds.

Finally, assess the time you are willing to dedicate to your 401(k). If your time is limited, the hands-off nature of a managed account can be an advantage. If you find managing your investments engaging, the unmanaged option provides the freedom to do so.