Researcher's asset management unit offers no-minimum, fractional-share SMAs. The new Pension Protection Act makes it harder for companies to avoid funding their pension plans. It also provides incentives to companies that create automatic enrollment processes for their defined-contribution plans. With these innovations in mind, Zacks Investment Management (Zacks IM) has combined its own LifeCycle investment strategies with FOLIOfn's investment-trading technology and Benefit Consultants Group's administrative capabilities to offer 401(k) plans with separately managed account (SMA) characteristics.

"The new law and our new plan represent a paradigm shift in the defined contribution market," says Andrew Zimmer, managing director of Zacks IM, a unit of Zacks, a Chicago-based investment-research and database provider. "Workers will no longer have to be on their own in making investment choices in their company sponsored retirement plans."

Fundamental value

Specifically, Zacks IM's new Retirement Plan Solution gives participants plans that involves automatic enrollment, escalating savings and automatic investing and lets them customize their retirement plans to avoid over-concentration in a single company or sector or to align investment planning with notions of social responsibility.

Of course one of the main selling points of the retail SMA, tax optimization, is moot in a tax-deferred 401(k) plan. But the "fundamental value proposition" of SMAs -- the ability to tailor investments to fit the participant's personal preferences -- remains, says Randy Bullard, president of Placemark Investments, a Dallas-based overlay manager and third-party SMA platform provider to distributors in the retail investment space.

"Incorporating this feature into the Zacks IM's Retirement Plan Solution will raise the standard of 401(k) plans," says Zimmer. "The [separately managed account] structure of Zacks' 401(k) offering is extremely unique in the defined contributions arena."

Overall, Zacks IM's approach to 401(k) plans makes sense to Bullard. "It sounds like a perfectly logical offering to me," he says. "It's only industry inertia that has made 401(k)s synonymous with mutual funds."

First generation

In fact, says Zimmer, given its access to a variety of investment styles, it may be fair to call Zacks IM's new offering "a 401(k) plan with the characteristics of a multiple-discipline account (MDA)."

Viewed through a retail lens, Zacks IM's 401(k) looks like a first generation version of the MDA. According to a 2002 study by the Financial Research Corporation, a Boston-based research affiliate of BISYS, first-generation MDAs offer a number of all-proprietary investment styles in a single registered account. To complete the recitation, second-generation accounts feature a mix of in-house and affiliated investment management, third-generations blend in-house (and possibly affiliated) management with non-proprietary accounts, and fourth-generation MDAs feature outside managers exclusively.

Proponents of retail MDAs say they provide broader diversification at lower minimums than is generally available using an array of similarly configured stand-alone SMAs.

Fractional shares

Whether or not Zacks IM's Retirement Plan Solution is the retirement plan's answer to the MDA, its arrival may be a boost to the SMA industry. "We've been talking about this for a while," says Zimmer. "There's no reason [401(k) owners] should have to be stuck with a roster of mostly crappy mutual funds."

In addition to a greater measure of control over investments than most mutual-find-based 401(k) plans allow, other characteristics of the plan include a transparent view to the investor of all holdings and transactions.

FOLIOfn's technology is crucial to Zacks' new 401(k) offering. The Vienna, Va.-based brokerage's models-based approach to portfolio construction and fractional-share technology keep investment minimums well out of in the low six-figure range that retail SMAs typically entail. In fact, says Zimmer, investment minimums don't really enter the equation. "With a rollover of $500 or even less, we can create a genuine SMA-style plan," he says. "There's practically no limit to what we can do."

Who's asking

That said, Zacks IM still expects to see a lot of high-end takers for its Retirement Plan Solution. "Certainly we can bring the SMA style of investing to rank-and-file workers," says Zimmer. "But truth be told, we can also create SMA-style investing for closely held companies -- like medical and dental practices -- with very highly compensated employees. In fact, we see that as one of our biggest markets."

The plan uses models based on Zacks IM's LifeCycle stock and bond portfolios, which adjust their weightings in asset classes over time as the employee nears retirement.

In addition to FOLIOfn, Zacks IM relies on Delran, N.J.-based Benefit Consultants Group for initiation, accounting and reporting services for its 401(k) Retirement Plan Solution.

Its "SMA-like" 401(k) offering isn't the closest Zacks IM gets to real-life SMAs. According to Zimmer says the firm manages over $600 million in retail SMA assets, the bulk of it distributed directly to private clients by Zacks IM's investment-advisory business.

Judging by queries Zacks IM has so far received, some registered investment advisors are "looking to incorporate the Zacks' strategies" into their own 401(k) offerings, according to Zimmer. -FWR

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