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Managed Accounts Improve Portfolio Performance--for a Price

By Stephen Miller  8/22/2006
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Defined contribution plan participants who selected for their plan holdings a "managed account" program typically saw their annual returns rise by 0.82 percent after fund expenses but before any added managed account fee, according to a research report, Managed Accounts and Participant Portfolios, from financial services firm Vanguard.

In managed accounts (also known as a "separately managed accounts"), individuals are assigned a basket of mutual funds based on their age and risk tolerance, and taking into consideration outside assets they may own and other retirement income they can expectsuch as from a defined benefit plan, Social Security and even a spouse's portfolio. Computer models devise a recommended asset allocation plan and automatically manage the portfolio.

Managed accounts are in some ways similar to lifecycle (or lifestyle) mutual funds, but they are a more "custom-made" investment solution, closely tailored to an individual's overall financial situation.

Employees, however, should be aware that managed accounts can involve higher fees. In addition to the annual "expense ratios"the management fees charged by the funds held in the accounta "wrap fee" might also be charged by the financial firm or adviser providing the managed account services. A wrap fees can often add 0.30 percent or more on top of the expenses charged by the mutual funds held in the account.

The better returns in the Vanguard study were attributed to the fact that nearly two-thirds of participants who adopted a managed account advisory service saw a sharp increase in their stock fund exposure, as opposed to safer but lower-performing bond or money market funds. 

Stephen Miller is an online editor/manager for SHRM. 

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