When Managed Accounts Make Sense

By Markets Fool.com

Another year, another look at your 401(k) portfolio, and possibly another sigh of frustration. What are you supposed to do? How well did you do, really?

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If this sounds familiar, you may have been tempted to just hand your portfolio over to an institution through a managed account and call it a day, letting someone else call the shots and deal with all the details.

So, is it a good idea? While managed accounts struggle to beat the "optimal" 401(k) strategy, they may very well beat the "human" strategy that's causing you so many headaches and problems.

Here's what you need to know.

The heart of the matter: Fees
Fees are important because they add up quickly and compound over time -- and managed accounts mean more fees.

These include any charges for the service plus whatever fees the selected mutual funds carry. If your manager favors active management (likely, as it provides a justification for managing the account), you're also looking at paying for higher-cost, actively managed mutual funds.

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In other words, paying more for help could end up costing you more than your own mistakes would have. The government's General Accounting Office found that the offsetting influence of fees could counteract the benefits of extra help, which, depending on the situation, could put you back right where you started.

The optimal solution
So, what do you do?

For most people, the optimal solution would be to put your savings in a diversified portfolio of low-cost index funds. These cheap funds track known indexes, which means that both the fees you see, like the expense ratio, and the ones you don't, like trading costs, are lower.

Not convinced? Morningstar, which rates mutual funds, found that low fees are the best indicator of long-term mutual fund performance. The Morningstar rating beat the expense ratio as a predictor of performance less than 50% of the time.

In other words, the fund-rating expert is saying that if you want to find a great long-term performer, look at cost first, and its proprietary rating second.

So, for the best long-term performance, go low-cost, diversify, and don't trade a lot.

But there's theory, and then there's practice
However, not all of us have the patience, energy, and stomach for this kind of investing. That's just a reality.

If you struggle to save, find the whole process stressful and confusing, or are sorely tempted to trade every time something happens in the market, you might benefit from extra help.

This is where managed accounts might start to make sense. The GAO found that managed account participants do tend to have better diversification and higher savings rates, implying that these managers do add some value and get more out of their accounts. You might not perform as well as the best-case scenario, but you might very well outperform the realistic scenario.

Making it work
Think practically about what you struggle with when it comes to your 401(k). If you want to take the investment process out of your hands entirely, you might want to consider a managed account or target-date fund. Compare the costs and try to size up the pros and cons, and go from there.

If you're looking for help and guidance, a managed account might also offer you support, but you might find it through your 401(k)'s designated advisor, if you have one, or from an outside financial planner. Fee-only financial planners can do portfolio assessments for you and have no strings attached or conflicts of interest, so that's a possible route. If you decide you'd like holistic help, a full-service financial advisor might be a good option.

Of course, you pay for these services. In the strictest sense of investment performance, they might not be worth it -- but if you are struggling on your own or making a lot of investment mistakes, they might very well be worth it to you.

The article When Managed Accounts Make Sense originally appeared on Fool.com.

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