Managed Accounts Could Be Made Safer for 401(k) Investors: GAO

DOL to mull improvements to better protect investors in managed accounts

Among issues under consideration are conflicts of interest and fiduciary status. Among issues under consideration are conflicts of interest and fiduciary status.

The Department of Labor will consider recommendations made in a report by the Government Accountability Office that will require more disclosures and better guidance for retirement plan sponsors from managed account providers, according to the GAO.

Originally published in June but not released to the public until July 29, a new report by the GAO, “401(K) Plans: Improvements Can Be Made to Better Protect Participants in Managed Accounts,” reviewed eight managed account providers who represented 95% of the industry in 2013 to see how they structured those accounts.

GAO recommended the DOL review provider practices to see if there are any conflicts of interest and how they should be addressed. For example, most of the providers studied allow participants to stay in the managed account after they retire. That could lead to a conflict because providers have a “financial disincentive” to recommend the participant buy an annuity or roll assets into other plans “because it is advantageous for them to have participants’ continued enrollment in their managed account service offered through a 401(k) plan.”

The GAO also recommended that the DOL consider providers’ fiduciary status. The report noted that managed account providers are already generally required to be 3(38) fiduciaries when services are offered as qualified default investment alternatives, but said there is “no similar explicit requirement for managed account providers whose services are offered within a plan on an opt-in basis.”

Under the Employee Retirement Income Security Act, 3(38) fiduciaries can manage, acquire or dispose of plan assets and acknoledge in writing that they are the fiduciary to the plan. By contrast, 3(21) fiduicaries do not usually do these things, but are considered fiduciaries anyway because their investment recommendations may influence plan investments.

When plan sponsors contract directly with the managed account provider, the provider is generally a fiduciary, GAO found. Some providers use subadvised arrangements, though, where the plan’s recordkeeper or affiliate takes on some fiduciary duty.

However, all of the providers studied noted that they take on at least some level of fiduciary duty, regardless of whether they offer their services on an opt-in basis or as the QDIA in a plan. Most said they willingly take on 3(38) status. One said it is only a 3(21) fiduciary because it only has discretion over participants’ investments one time each year.

The report also recommended that the Employee Benefits Security Administration provide guidance for sponsors who offer managed accounts or who are considering it, and require that their recordkeepers offer more than one provider option.

Regarding performance, the GAO report recommended that service providers be reqired to show standardized performance and benchmarking information to sponsors and that sponsors provide the same for participants.

Managed accounts were first introduced in 1990, but weren’t widely used for at least a decade. The DOL allowed sponsors to use them as QDIAs in 2007. Rep. George Miller, D-Ind., ranking member on the Committee on Education and the Workforce, estimated in the report that there were at least $100 billion in managed accounts in defined contribution plans by the end of 2012.

“Demand for managed accounts may continue to grow, as these services may be attractive to the many 401(k) plan participants who may lack the knowledge or initiative to make prudent choices about how much to contribute and how to direct their assets among investment options in their plan,” he wrote.

The report found providers offer the same basic service, but vary in how they structure the plans. “The eight providers in our case studies use different investment options, employ varying strategies to develop and adjust asset allocations for participants, incorporate varying types and amounts of participant information, and rebalance participant accounts at different intervals,” according to the report. “As a result, participants with similar characteristics in different plans may have differing experiences.”

For example, Provider 1 might allocate 35% of a hypothetical 30-year-old investor’s managed account to a foreign large blend fund, while Provider 3 allocates just 10%.

The report found some providers making a distinction between “customized” service and “personalized” service, with customized service taking into account a participant’s age, gender, income current account balance and savings rate. Personalized service, on the other hand, also considers risk tolerance and spousal assets. Six of the providers studied offer both levels of service.

Those providers reported that typically, less than a third of participants share that information, even if they’re paying for the service.

Providers vary in rebalancing strategies, too. All but one of the providers studied use a “glide path” approach, where they systematically reduce risk over time, and most rebalance at least quarterly.

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