More On Legal & Compliancefrom The Advisor's Professional Library
- Updating Form ADV and Form U4 When it comes to disclosure on Form ADV, RIAs should assume information would be material to investors. When in doubt, RIAs should disclose information rather than arguing later with securities regulators that it was not material.
- Do’s and Don’ts of Advisory Contracts In preparation for a compliance exam, securities regulators typically will ask to see copies of an RIAs advisory agreements. An RIA must be able to produce requested contracts and the contracts must comply with applicable SEC or state rules.
David Weiskopf isn’t feeling at all defensive about the Government Accountability Office report on 401(k) managed accounts, despite the fact that it raised some pretty serious questions about their worthiness.
In fact, you could almost say he found the report to be positive.
“Managed accounts may not be for everybody,” concedes Weiskopf, a senior director of communications a Financial Engines, a Sunnyvale, California-based managed account provider. “But we are absolutely confident in the value we provide sponsors and their enrollees. And we know we’re delivering it at a fair price.”
A 401(k) participant with a managed account is supposed to receive professional investment advice tailored to their specific needs. According to research by Cerulli Associates, 401(k) managed accounts now hold about $108 billion in assets. The Plan Sponsor Council of America says that 36 percent of employers offered managed accounts in 2012 — up from 25 percent in 2005.
In examining the eight largest providers of managed accounts – none were named in the report – the GAO found that some may be leaving plan sponsors open to fiduciary liability.
The GAO’s investigators also found a wide variance in fees charged by providers — between $8 and $100 on every $10,000 invested – and said that the higher fees can wipe out the higher returns seen in managed accounts.
Also, limited fee disclosures as well as a lack of adequate benchmarking leaves managed account holders in the dark about what they pay for the service and whether the results are worth it, the GAO report said.
Given that Financial Engines is the largest independent provider of managed accounts (bigger than the next nine combined, according to Weiskopf), it’s pretty safe to assume the company was one of the eight unnamed subjects of the GAO report.
As an independent provider, Financial Engines stresses it has nothing do with selecting the investment vehicles that sponsors offer their participants.
“That’s not our value-add. Once the sponsors build out their lineup, then we come in and work with individuals to design the best portfolio for their specific needs,” Weiskopf said.
On average, Financial Engines account holders pay about 40 basis points in fees, less than half of the most expensive accounts the GAO looked at. That, of course, doesn’t take into consideration the fees participants pay on the funds they buy.
And that begs the question: when it’s all said and done, are managed accounts worth the money? The GAO wasn’t at all sure that they are.
Financial Engines, naturally, feels otherwise.
“For non-conflicted, institutional-quality advisory services? From our perspective, people need help. We feel we offer high a level of guidance for enrollees, at what amounts to a very fair price,” said Weiskopf.
Check out Managed Accounts Could Be Made Safer for 401(k) Investors: GAO on ThinkAdvisor.