Wall Street & Technology is part of the Informa Tech Division of Informa PLC

This site is operated by a business or businesses owned by Informa PLC and all copyright resides with them. Informa PLC's registered office is 5 Howick Place, London SW1P 1WG. Registered in England and Wales. Number 8860726.

Asset Management

12:38 PM
Connect Directly

The Perfect Partner

Technology strategies play a key role in selecting independent investment advice providers for 401(k) managed-accounts programs.

The use of an independent third party to manage 401(k) accounts is a growing trend among financial services firms in the defined contribution business. Most major firms, including Fidelity, Merrill Lynch and Charles Schwab, have turned to companies such as Ibbotson Associates, Guided Choice and Financial Engines to cater to investors who've opted for a 401(k) managed-accounts program. The different technology strategies of those vendors are playing a part in investment firms' choices of account managers.

Regulation is contributing to the trend of hiring third-party managers. Under the Employee Retirement Income Security Act, providers are prohibited from managing participants' 401(k) accounts; they must be managed by a third party. So, as more investors look for a 401(k) manager, more firms are inking partnerships with independent investment advice providers.

The popularity of 401(k) managed accounts is growing so rapidly that offering that option may soon become a competitive necessity to win corporate 401(k) business. Gene Kim, a senior analyst at research firm Financial Insights, compares the way providers' defined contribution plans compete with each other to the way that firms compete for employees. A 401(k) managed account offering is "one weapon in the arsenal," he says.

When Advised Assets Group (AAG), a registered investment adviser subsidiary of Great West Life of Greenwood Village, Colo., was considering six vendors to help launch its 401(k) managed-accounts program, AAG investors had the final word. Results from numerous participant focus groups pointed to a need for a seamless program that could accommodate the different needs of participants with different levels of investment knowledge.

AAG selected Chicago, Ill.-based Ibbotson for the vendor's flexible business model. "We had a vision for how we wanted the program to be delivered," says AAG managing director Amy Tlachac. "The flexibility that Ibbotson's business model presented to us allowed us to have complete control over how we talked to our participants."

Ibbotson is leveraging technology as part of its competitive differentiation. Many management-services vendors use an application service provider (ASP) model that exports client information to their sites and then reintegrates participant account changes back into providers' sites. Ibbotson, however, relies on proprietary software that they re-license to the plan provider. Essentially, the technology is an off-the-shelf solution that firms can integrate into their own systems, and participants seamlessly obtain Ibbotson's financial advice directly from their providers.

Tlachac says the approach is a huge security benefit. "We wouldn't have any participant data going outside our firewall," she says. AAG began implementing the software in February and went live with it in October.

Is It Safe?

But not everyone thinks Ibbotson's model offers a significant security benefit. There haven't been any reported problems with the ASP platforms that companies such as Financial Engines utilize in their business models, Financial Insights' Kim says. "You could actually transfer participant data through a dedicated line; it's not going over public [lines], so it might as well be behind a firewall," he explains.

1 of 3
Register for Wall Street & Technology Newsletters
Top Quotes of the Week
Top Quotes of the Week
It wasn't all bad luck for the capital markets this week: Hedge funds had a decent first quarter despite a slowdown in jobs numbers, BlackRock might be heading into new territory as hedge fund managers take a hard look at their counterparties, and the head of the IMF didn't pull any punches when assessing today's global economy. At least we can admire the nice weather and some of the best quotes of the week.