A Social Security cost-of-living adjustment could have a small but positive impact on retirement planning.
By Cyril Tuohy
Financial advisors and retirement plan sponsors abuzz about the increase in “managed accounts,” available to 401(k) investors may do well to tone down their excitement in the wake of a Government Accountability Office (GAO) report that finds much room for improvement in how the accounts are structured.
The disparity in the way managed accounts are structured means there’s little uniformity governing managed accounts, either for the retirement investor or the investor’s employer, the plan sponsor, the report also found.
Managed accounts offered by some retirement plan providers deliver on the promise of professional advice, diversified investing and reasonable cost. For other defined contribution plan investors, managed accounts only deliver average performance, GAO auditors found.
“As a result, some participants pay a low fee each year while others pay a comparatively large fee on their account balance,” the GAO report said.
Government investigators are taking a closer look at managed accounts, particularly since some of them qualify as default investment alternatives into which 401(k) plan fiduciaries may steer contributions into these accounts by default, barring instruction from investors.
The GAO report, which reviewed eight managed account providers representing about 95 percent of the industry involved in defined contribution plans, pointed to the variety of managed accounts offered through retirement plans.
From investment strategies to fee schedules, from benchmarking information and comparative data, from fiduciary responsibilities to transparency, there’s very little consistency from one managed account provider to the next, the report found.
Over time, an IBM employee investing in a managed account will experience a very different outcome than a General Motors employee who invested in the managed account options offered by the automaker’s retirement plan provider.
If those two employees, working for their respective employers, decided to invest in the Standard & Poor's 500 index, each would finish in exactly the same place if they deferred identical amounts over identical time periods.
GAO investigators, who delivered the report to the House of Representatives in June, said plan sponsors “are challenged by insufficient guidance and inconsistent performance information when selecting and overseeing managed account providers.”
The idea of a managed account isn’t new. It’s been around for years, but recently 401(k) plan sponsors have begun offering more participants the option of using a managed account as a way to benefit from professional investment advice.
With interest rates still low, there’s some pressure for retirement plan investors to extract more yield out of their portfolios, and one way of doing that is by seeking professional help from a financial or an investment manager through the managed account.
Managed accounts are often compared to target-date funds or target risk funds, but are in reality very different.
Target date funds gradually reduce their exposures to stocks as an employee approaches his or her retirement date. Target risk funds, sometimes called lifestyle or life strategy funds, invest based on how much risk an employee is comfortable taking.
Managed accounts, however, are not an asset allocation strategy but rather a service offered to plan sponsors.
As a result of using different investment options, investors “with similar characteristics in different plans may have differing experiences,” the report said.
Proponents of managed accounts say they get more diversification and even experience higher savings rates compared to employees not enrolled in managed account services. Fees, however, can offset the advantages of diversification.
Managed account plan providers will charge $20 annually whether the account balance is $10,000 or $500,000. Other providers with a variable fee model might charge as little as $25 annually or thousands of dollars.
Nor is the role of the managed account provider uniform from one managed account provider to the next, GAO researchers found.
Plan sponsors, or the sponsoring employer, are typically the named fiduciaries of the plan, but managed account providers and record keepers “may also be fiduciaries, depending on their roles and the services they provide,” the GAO said.
Managed accounts have been available in some 401(k) plans for many years, but managed accounts are starting to turn up in 403(b) retirement plans offered to employees of nonprofit and government organizations, and even to individual retirement account (IRA) investors, as well.
GAO researchers find there’s plenty of room for plan providers to improve managed account services to retirement plan sponsors and plan participants.
“Despite the potential advantages, better protections are needed to ensure that participants realize their retirement goals,” said GAO report said.
Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. Cyril may be reached at email@example.com.
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