Appeal of separately managed accounts grows
Tom Anderson. Employee Benefit News. Washington: Jun 15, 2005. pg. 1
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Abstract (Document Summary)
"Professional firms are a good fit for separately managed accounts and we've seen
growing interest in SMAs by those plan sponsors," says Norm Nabhan, national director
of the consulting group at brokerage firm Smith Barney. These companies have large
enough balances to warrant having separately managed accounts in their retirement
plans, Nabhan explains.
The primary reason firms would use [SMAs] is because they have lower costs than
mutual funds in some cases, explains Gerard Mullane, principal at The Vanguard Group.
The accounts are common to defined benefit plans, but are rarely used in defined
contribution plans. "We have thousands of defined contribution sponsors and two or
three with separately managed accounts in their plans," he says.
Technological advances have made it easier to money management firms to reduce
their minimum investment requirements to below the traditional $1 million mark when
separately managed accounts were first introduced. Now some firms offer SMAs with
minimums as low as $50,000. Lower minimums mean a larger pool of affluent investors
can use SMAs.
Full Text (741 words)
Copyright Thomson Media Jun 15, 2005
Separately managed accounts, which allow investors to customize portfolios of stocks,
bonds and cash that are guided by professional investment managers, have started to
appear in the retirement plans of some employers.
"Professional firms are a good fit for separately managed accounts and we've seen
growing interest in SMAs by those plan sponsors," says Norm Nabhan, national director
of the consulting group at brokerage firm Smith Barney. These companies have large
enough balances to warrant having separately managed accounts in their retirement
plans, Nabhan explains.
Typically, investors need to have at least $100,000 to open an SMA. But, the account
minimums may vary depending on the financial firm's product or sponsor's plan rules.
Under ERISA, employers must offer a retirement plan that gives equal access to all
participants. This limits the growth of SMAs to firms with employees that have incomes
large enough to make those accounts feasible to provide.
SMAs should not be confused with "managed accounts" offered in 401(k) plans, which
provide workers a pre-set portfolio that is managed to a pre-selected risk tolerance or
retirement date.
The primary reason firms would use SMAs is because they have lower costs than
mutual funds in some cases, explains Gerard Mullane, principal at The Vanguard Group.
The accounts are common to defined benefit plans, but are rarely used in defined
contribution plans. "We have thousands of defined contribution sponsors and two or
three with separately managed accounts in their plans," he says.
How SMAs work
SMAs have been around more than 25 years, but have gained momentum as employers
re-examined their retirement plan in the wake of Enron and other corporate scandals,
Nabhan explains.
Once only the domain of the wealthiest investors, SMAs have "a little panache" among
high-income retirement plan participants looking for similar services, says Steve
Gresham, executive vice president at financial firm Phoenix Investment Partners. But,
most investors "would rather have performance than cache in lieu of performance,"
Gresham notes.
Technological advances have made it easier to money management firms to reduce
their minimum investment requirements to below the traditional $1 million mark when
separately managed accounts were first introduced. Now some firms offer SMAs with
minimums as low as $50,000. Lower minimums mean a larger pool of affluent investors
can use SMAs.
Separately managed accounts are like mutual funds in the sense that money managers
create a model portfolio for each investor that focuses on a particular asset class or part
of the market, such as large cap, small cap, growth, value, etc. In order to properly
diversify, investors usually need to have more than one SMA.
The main difference between mutual funds and separately managed accounts is that, in
an SMA, the money manager is purchasing the stock, bonds and cash in the portfolio on
behalf on the investor, not on behalf of the fund.
"Separately managed accounts are transparent. Investors can see exactly where their
money is going and how much is going to fees. You can see everything in the account
everyday," Nabhan observes.
Fees vary based on the investment manager and the size of the account. "It all depends
on the assets under management whether plan costs can be lower than those offered in
a traditional 401(k)," Nabhan says. "But saving 4/10ths of a percent on $500 million plan
is not pocket change."
SMA pros and cons
Separately managed accounts require talented money managers to devise portfolios
and execute strategies, Gresham notes. The price for good money managers could grow
as Baby Boomers are set to retire and more investors hunt for higher returns. "The
capacity of money management firms to offer SMA is an issue," he says.
The "packaging" of retirement plans should matter less than the performance, Gresham
explains.
Some plan sponsors worry about providing employees with investment advice due to
possible lawsuits if the advice backfires. With separately managed accounts, fiduciary
responsibility is less of a concern because each employee would work with an
investment adviser, Nabhan says.
The customization can allow employees who hold a large concentration in a particular
industry, such as technology, to exclude all shares of tech companies in their SMA. They
can also exclude stocks for social reasons, like shares of tobacco companies or
weapons manufacturers.
SMAs can be very attractive to professional firms that have business partners who want
to pursue disparate investment strategies in their companies' retirement plan, Nabhan
notes.
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