The U.S. Government Accountability Office is calling on the Labor Department to step up disclosure requirements for managed accounts in 401(k) investment lineups.
In a 92-page tome released on Tuesday, the GAO discussed its analysis of eight managed account providers who last year represented about 95% of the industry that's involved in defined contribution plans. The study examined the way providers structured these managed accounts, the pros and cons for participants, and the difficulties plan sponsors face when it comes to choosing providers.
In the context of a 401(k), managed account portfolios permit a third-party expert to create and manage the investment portfolio of a given participant. They may take the form of a customized target-date fund or a customized risk-based allocation portfolio, typically using the components of a 401(k)'s menu of standalone funds.
These options have become increasingly popular as advisers who can't act as fiduciaries to plans have been outsourcing management capabilities to managed account providers who act as a 3(38) investment manager or a 3(21) investment adviser fiduciary — a co-fiduciary with the plan sponsor — under the Employee Retirement Income Security Act of 1974. The former has discretion over plan assets, while the latter can have a say on the investments available in the plan.
In its study, the GAO found there's room for improvement for managed account providers, at least when it comes to spelling out details on fees, performance and benchmarking. Though the Labor Department has called for disclosure of such details for other retirement plan investments, it generally hasn't been the case for managed accounts, according to the GAO.
The level of services and strategies among the eight managed account providers was also very different, according to the GAO. Two of the providers offer a customized service, wherein they allocate a client's account based on age and other data points gleaned from the record keeper, while the other six offer personalized services that consider the individual preferences of the workers when coming up with asset allocations.
Those discrepancies also came up as the report examined the extent to which the managed account providers acted as fiduciaries. “One of the eight providers GAO reviewed had a different fiduciary role than the other seven providers, which could ultimately provide less liability protection for sponsors for the consequences of the provider's choices,” the GAO noted in its report.
“Absent explicit requirements from DOL, some providers may actively choose to structure their services to limit the fiduciary liability protection they offer,” the agency observed.
A wide range was also found in the fees workers paid for their managed accounts. “Providers charge additional fees for managed accounts that range from $8 to $100 on every $10,000 in a participant's account,” the GAO noted. “As a result, some participants pay a low fee each year while others pay a comparatively large fee on their account balance.”
Managed account users also don't receive benchmarking and performance data. Based on that finding, the agency highlighted that the Labor Department “generally does not require plan sponsors to provide this type of information for managed accounts.”
The prospect of increased disclosure requirements is a long-time coming, noted Marcia Wagner, an ERISA attorney at The Wagner Law Group. “I'm a fan of managed accounts, and I have no problem with what the GAO says here,” she noted. “There has to be transparency; you have to know the fees, the prior experience. People need to know what they're buying.”
At the same time, however, an additional layer of disclosures could prove difficult for small RIA firms that provide managed account services. Such firms would have to not only come up with a way to report that data but also find a way to share that information with plan participants.
“The average RIA — four or five people in an office in a suburb — they won't invest in the reporting technology,” said Jason C. Roberts, CEO of the Pension Resource Center. “Even if they had it, will the record keeper push it out, or do you have to create a distribution system for it?”