More needs to be known about managed account services for retirement plan participants and the role employer plan sponsors play in offering them, according to a report released on July 29 by the U.S. Government Accountability Office.
Because these services differ from investment options provided within 401(k) plans, yet can serve as a qualified default investment alternative, little is understood about whether they are advantageous for the minority of participants who select them. The potential for confusion about managed accounts among sponsors also led the U.S. House of Representatives’ Committee on Education and the Workforce to commission GAO to conduct this 2013 review of eight managed account providers.
Background
In 2007, the U.S. Department of Labor designated certain managed accounts as one type of investment that may be eligible as a QDIA into which 401(k) plan fiduciaries may default participants who don’t give investment directions for their plan contributions. Managed accounts are run by an investment management service that uses investment alternatives available in the plan and are designed to become more conservative as the participant’s age increases, explains the GAO report, titled “Improvements Can Be Made to Better Protect Participants in Managed Accounts.”
DOL regulations state that plan fiduciaries who comply with the QDIA regulation will not be liable for any loss to participants from investment of their assets in a QDIA, including investments made through managed account arrangements that satisfy these conditions. However, plan fiduciaries remain responsible for the prudent selection and monitoring of any QDIA offered by the plan.
GAO’s research found a proliferation of available managed accounts since about 2000, after first being offered in 1990. At present, eight managed account providers represented 95 percent of the industry for DC plans, the report said. (It did not name any of the providers.) GAO estimates total DC plan assets in managed accounts were more than $100 billion at the end of 2012.
The study looked at: (1) how providers structure managed accounts; (2) their advantages and disadvantages for participants; and (3) challenges sponsors face in selecting and overseeing these providers. Among other types of review, GAO examined required government filings by these providers.
One caution made by GAO in the report was the fact that providers vary their structure for managed accounts, and their reported fiduciary roles, which could lead to less liability protection for sponsors for the consequences of participants’ investment decisions. DOL requires managed account providers that offer services to defaulted participants to usually have the type of fiduciary role that also provides certain protection for sponsors and assurance of the provider’s qualifications.
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