This 401(k) Will Provide Specific Investment Advice to Fit Your Life
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What is the main topic discussed in this episode?
Here's your Money Briefing for Monday, February 5th. I'm J.R. Whelan for The Wall Street Journal. Most people invest in 401k retirement accounts that allow them to put money away for use later in life. However, the money isn't invested according to their individual needs. And a growing number of people are signing up for 401ks that are geared specifically for them.
They're offering to give you more customized advice that's specifically tailored to you as a person. So instead of putting you into an age-based portfolio where the division between stocks and bonds is just based on one factor, which is your age, the managed account is offering to manage your 401k investment.
We'll talk to Wall Street Journal retirement reporter Ann Tergesen after the break.
Some retirement investors are choosing a customized 401k account instead of the traditional one-size-fits-all type of account.
What is a managed or customized 401(k) and how does it differ from a target‑date fund?
Wall Street Journal reporter Ann Tergesen joins me with the pros and cons. Ann, what are the investment differences between a traditional 401k and a more customized managed 401k account?
Often there's something called a target date fund, which is kind of an all-in-one fund. It shifts from stocks to bonds as people get older. And when people are automatically enrolled, that's usually where they end up. So a very large proportion of people in the 401k end up in these target date funds. And, you know, it's basically the differentiation between, say, what I would have in a target date fund and what you would have is it comes down to age. And so the older you You are the more you have in bonds, the less you have in stocks. But they're a bit of a one-size-fits-all solution in that you and everybody in your age group is going to wind up in the same portfolio.
If you're in a customized 401k, how is it managed?
Not every 401k offers a managed account, but a significant proportion of them offer them. Depends on whose data you look at, but it can be sort of from 40% to 60% of companies are now offering these. They're offering to give you more customized advice that's specifically tailored to you as a person.
How many employers now offer managed 401(k) options and who qualifies?
So instead of putting you into an age range, based portfolio where the division between stocks and bonds is just based on one factor, which is your age, and they're going to try to customize it for more factors. For example, they might take into account things like your gender, your income, your savings rate.
You mentioned there's a fee involved, but what's the appeal here to users of the managed account?
Well, usually the way they're marketed and I think the appeal is that they're going to do something customized for you. So the idea is I'm a unique person. I have unique financial needs. The older you get, the more complicated your financial life tends to be. So this pitch of personalized 401k or something that's uniquely customized to you resonates with people.
What kind of personal information do people have to submit to a managed 401k in order for it to be effective?
It's interesting because there's data that the record keeper just knows about you. You don't have to actually tell them how old you are.
What personal data do managed 401(k) providers use to customize portfolios?
You don't have to tell them what state you live in. You don't have to tell them how much you're saving. The 401k record keeper knows all that. And the 401k record keeper can provide that data to the managed account. So they know a certain amount about you without you ever having to lift a finger or even think about communicating with them. But in order for these accounts to truly be customized, there is a certain amount of communication that ideally should happen. Number one is risk profile, risk tolerance. Often there are questionnaires. They try to suss out, you know, are you somebody who's very comfortable with a high proportion in equity? Are you comfortable taking an aggressive approach? Are you somebody who really gets all freaked out every time the market goes down?
Maybe you're more comfortable being more conservative. That's the kind of information they just can't tell from the information that's on file.
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Chapters
8 chapters
1
What is the main topic discussed in this episode?
0:02–1:18
2
What is a managed or customized 401(k) and how does it differ from a target‑date fund?
1:18–2:33
3
How many employers now offer managed 401(k) options and who qualifies?
2:33–3:30
4
What personal data do managed 401(k) providers use to customize portfolios?
3:30–4:52
5
How do providers assess risk tolerance and why does that matter for customization?
4:52–6:29
6
What are the fees for managed 401(k) accounts and are they worth the cost?
6:29–7:19
7
Do managed 401(k) accounts deliver better investment returns than target‑date funds?
7:19–8:21
8
How easy is it to switch between a target‑date fund and a managed 401(k), and what engagement is required?
8:21–8:23
Speakers
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