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GAO urges stricter regulation of managed accounts

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Managed account providers may be leaving plan sponsors vulnerable to fiduciary claims and often disclose too little about their fees and performance to help participants, the Government Accounting Office said in a report released today. 

401(k) plan sponsors have increasingly offered their participants managed accounts. Such accounts provide participants with a team of investment professionals who actively manage their retirement savings account.

The GAO reviewed eight managed account providers that represented most of the industry in 2013. It found they all varied in how they structured managed accounts, including the services they offered and their reported fiduciary roles. One of the eight providers defined their fiduciary role in a way that was different from the rest, according to the GAO’s findings. 

The Department of Labor has clear fiduciary requirements for managed account providers offering services to plans whose participants are “defaulted” into a managed account. Those guidelines offer sponsors protection against the actions of the providers, and also provide participants assurance that the provider is acting in their best interest. 

But the DOL “does not have a similar explicit requirement for providers who offer services to participants on an opt-in basis,” the GAO said. And that could encourage providers to “structure their services to limit the fiduciary liability protection they offer,” it said. 

The GAO also looked at the “limited fee and performance data available” and found that long-term benefits of managed accounts “could vary significantly,” given the wide range of fees providers charge, which the GAO found to be between $8 and $100 on every $10,000 invested. 

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Participants in managed accounts can expect to see “improved diversification and experience higher savings rates compared to those not enrolled in the service; however, these advantages can be offset by paying additional fees over time,” the GAO noted. 

Disclosure requirements generally enforced by the DOL on 401(k) plans and plan sponsors are not required of managed accounts, says the GAO. That means participants are not receiving important performance and benchmarking information, without which they can’t understand the value of the management services they’re paying for. 

The GAO also found disclosure requirements to the plan sponsors lacking, making it difficult for them to adequately compare providers’ services, costs and performance. The report did say that some providers thoroughly disclose their performance in spite of not being legally required to. 

The report did not reveal the names of the provider companies inspected. 

The GAO recommends the DOL create service provider roles, require the disclosure of benchmarking performance to sponsors and participants, and give sponsors guidance on how to select a managed account provider. 

In response, the DOL told the GAO it agreed with its recommendations.