I'm running an Arch system now, and I'm thinking of building LFS both for its educational value and for daily use. My main question is; how does keeping it up to date work? I know that package managers can be installed, but would I then use an existing repository, or is there some way to get notified of when the source of installed packages is updated? Can updates be handled in a somewhat efficient way? Keep in mind that I have no problem compiling source, but keeping track of every package is too much. Any help is appreciated.

Actually it is what you are thinking of it. Even when installing a package manager someone (means you) has to build the updated packages. So if you want to update a LFS system it doesn't matter if you use a package manager or not, you are the one in charge.
It may be possible to use the repos from other distributions for that purpose, but what would be the point in running LFS then?
IMHO LFS is a nice system for educational purposes. But few people run it as any-day-system and if you don't want (or simply don't have the time/resources) to maintain your own distro it would be better to run a different distro.

Ok, so then is there an easy way to keep track of packages as the source is released? If not would Gentoo be a good compromise between where I am with Arch and LFS.

herehttp://www.linuxfromscratch.org/lfs/...06/pkgmgt.html is a page that might be worth reading I have not used it but might help

Check if the upstream developers have a mailing list and subscribe to it.

The main difference between Arch and Gentoo is that Gentoo is built from source. It has no advantages in learning how the system works down to its core. But exactly that is the purpose of LFS.
My recommendation in your case would be: If you are comfortable with Arch/Gentoo/whatever distro then keep it, but nonetheless build yourself a LFS system if you want to learn. There is no point to abandon your working distro for something that takes to much resources to be kept current. Learning from LFS will also mean that you will get a better understanding of your current distro.

I like the run a distro and keep a lfs drive for learning/experimental purposes idea. One last question then; is Gentoo better than Arch for overall customization and control?

Since Gentoo is source based you have better control with what dependencies/options your software is built, compared to the binary packages from Arch. Other than that there should be no advantage, it shouldn't matter if you use Arch, Gentoo or (my favorite) Slackware.

Thank you. I never thought of Slack. Are the packages usually up to date?

The ones that come with the distribution are usually up to date, but it depends on the packages (posting this with Firefox 10.0.2, running a self compiled 3.2.7 kernel, the standard kernel is 2.6.37.6). If you use Slackware -current you will be further to the cutting edge, but the main goal is stability.