Managed accounts have their place for some 401(k) investors, but no one should expect them to eclipse the role target-date funds play as the primary qualified default investment alternative in defined contribution plans, according to recent analysis by Cerulli Associates.

The conclusion comes as more critics of TDFs have emerged over the past two years.

Some have argued, too, TDFs' many glide paths carry too much equity risk as retirement nears. Others say they lack the ability to tailor specific strategies for investors that may have different levels of risk tolerance, or needed returns.

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"Elegant in their simplicity and ability to offer one-stop diversifications, the chief argument against target-date funds is their homogeneity, as they do not account for an investor's risk tolerance, specific retirement plans, or other assets," wrote analysts in the most recent issue of The Cerulli Edge.

Some industry watchers—and managed account apologists—have suggested those limitations warrant greater consideration for the role of managed accounts, which tailor investment strategies more specific to participant needs and data, going beyond age to incorporate factors such as salary, assets outside a 401(k) plan, and in some cases, a spouse's investments and projected income needs in retirement. Portfolios can be reallocated as frequently as a quarterly basis.

That level of customization comes at a cost, of course.

While more sponsors have been amenable to the managed account option, participants have been relatively slow on the uptake.

Cerulli says that as of the end of 2014, 22 percent of defined contribution plans offered a managed option, double from 2009. Because larger sponsors tend to offer managed accounts at a higher rate, over half of all plan participants had access to them.

But participants could be said to be skittish—just 7 percent of those with access selected the managed account option by the end of 2014.

Cerulli offers three explanations for the low level of adoption. Their higher cost is one factor. The second is the lack of benchmarking to compare providers' performance.

The third is a bit more nuanced. Providers and advocates of managed accounts claim they can tailor an investment strategy based on age, salary, current account value and savings rates.

But Cerulli suggests that data may not provide enough customization to give a clear value-add over TDFs.

"Without greater transparency into an investor's attitudes, goals and risk tolerance, the added benefit of customization relative to TDFs is less clear," according to Cerulli.

Beyond the risk-tolerance questionnaires' alleged limitations, Cerulli suggests the reality of participant inertia makes the productivity of those forms "unrealistic and counterproductive."

Despite those criticisms, and the fact the Cerulli "does not believe that the managed account should replace the target-date fund as the investment of choice in 401(k) and other DC plans," managed accounts do have a place for some retirement investors.

"For older investors who are approaching retirement, their financial picture is more fully realized and would benefit from a greater degree of customization," says Cerulli.

The analysts offer the example of a 62-year old in good health planning to retire early and the needs of a 68-year old who plans to work well into their 70s.

Each example has different investment needs, says Cerulli. "These investors can justify the extra cost and time investment associated with managed accounts as their asset allocations would vary depending on their age, savings, time horizons, and income expectations."

Cerulli suggests managed accounts be viewed as a compliment to TDFs, "not a rival."

By the end 2015, managed accounts held more than $188.5 billion in assets, with Financial Engines accounting for 60 percent of the assets, according to Cerulli's report.

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Nick Thornton

Nick Thornton is a financial writer covering retirement and health care issues for BenefitsPRO and ALM Media. He greatly enjoys learning from the vast minds in the legal, academic, advisory and money management communities when covering the retirement space. He's also written on international marketing trends, financial institution risk management, defense and energy issues, the restaurant industry in New York City, surfing, cigars, rum, travel, and fishing. When not writing, he's pushing into some land or water.