401(k) managed account push rife with conflicts of interest

Some providers are paying incentive compensation to representatives to promote their managed accounts to participants

Nov 28, 2017 @ 5:30 pm

By Greg Iacurci

Record keepers are looking to managed accounts to be their next 401(k) cash cow, but the way some firms are promoting the products to investors is rife with conflicts.

Several providers, including Nationwide, Voya Financial and ICMA-RC, offer incentive compensation to their advisers and representatives for getting plan participants to enroll in their paid managed account services.

The practice spans not just 401(k) plans, but also 403(b) and 457 plans, which are defined-contribution plans for nonprofit and governmental institutions. Some retirement industry observers say it puts representatives' economic benefit ahead of participants' interests.

"It seems like this is the dirty little secret of the managed account industry," said Scott Dauenhauer, principal at Meridian Wealth Management, of incentive compensation. "At the most basic level, you have a situation where someone is being incentivized to push a product and the participant and plan sponsor aren't aware of it. And that's just wrong."

Managed accounts are a more customizable version of target-date funds, offering participants a specific asset allocation based on data such as age, salary and overall savings. The programs offer discretionary management, whereby providers make and execute investing decisions for participants.


Record keepers have embraced managed accounts amid a challenging environment of fee compression as well as increased skepticism among plan sponsors of using TDFs and other investment funds that record keepers offer through affiliated asset-management divisions. These trends have starved record keepers of revenue, leading firms to seek out profitability elsewhere.

"Record keepers are looking for any revenue they can from assets and investments," said Fred Barstein, founder and CEO of The Retirement Advisor University. "Managed accounts are one of [those sources]."

Nationwide, for example, charges a maximum annual asset-based fee of 1.35% for its managed account product, ProAccount. That's in addition to any fees participants incur from the underlying investment funds.

Some firms' pricing can be more modest. ICMA-RC, which works primarily with governmental retirement plans, charges up to 0.40%, for example.

Investment adviser representatives with Voya Retirement Advisors, a Voya-affiliated RIA, are incentivized to promote the firm's Professional Management program to participants. Advisers may receive compensation for enrolling participants in the product over the phone, according to its most recent Form ADV filing with the Securities and Exchange Commission.

"This creates a financial incentive for the Advisor Representatives to enroll participants in the PM program," the disclosure says.

Similarly, advisers with Nationwide Investment Advisors are paid for enrolling participants into Nationwide's ProAccount product. That compensation may include both a base salary and incentives for the "amount of assets participants contribute to the ProAccount Clients' accounts," according to a recent SEC disclosure.

ICMA-RC ties compensation for "certain employees" to net new enrollments or the amount of new assets enrolled into its Guided Pathways Advisory Services managed account by participants, according to its disclosure.


Such incentives aren't necessarily against established rules or regulations, observers said, but it does raise questions as to why the practice exists.

"It's not every time that when there's smoke there's fire, but there's a lot of smoke," said Philip Chao, principal and chief investment officer at Chao & Co. "Why do they want to add incentives? To drive dollars there for what reason?"

Nationwide spokesman Ryan Ankrom said the firm provides both plan sponsors and participants with "full disclosure, including compensation, prior to enrollment," and that costs associated with the managed account are "transparent in quarterly statements and in regulatory filings."

Spokespeople for Voya and ICMA-RC didn't respond to a request for comment by press time.

Managed account programs aren't nearly as popular as other investment options, such as TDFs, but some observers expect them to play a much bigger role in retirement plans in the future due to their personalization capabilities.

Some attorneys, including Andrew Oringer, partner at Dechert, believe incentives need to be addressed carefully in light of the Department of Labor fiduciary rule, which partly took effect in June. That rule broadly expanded what is considered a fiduciary recommendation to plans and participants.

Not all providers give such incentives for managed account sales.

Vanguard Group, for example, doesn't offer incentive compensation, either direct or indirect, to representatives in association with its managed account program, said spokeswoman Laura Edling.


And Fidelity Investments, by far the largest record keeper of DC plans, doesn't directly compensate representatives for the number of enrollments they generate in the Portfolio Advisory Service at Work managed account program, according to its Form ADV.

However, some advisers believe parts of Fidelity's disclosure language are vague enough to leave room for certain compensation incentives for promoting its managed accounts.

The disclosure says that a portion of representatives' variable compensation is based on "subjective" assessments, including "an assessment of whether the representative is appropriately profiling the participant's needs and presenting the solutions that are most aligned to those needs," including Fidelity's managed account offering. In addition, the document says representatives also are measured on "their ability to accurately position the value proposition and details of all solutions available to the participant."

Fidelity spokeswoman Nicole Goodnow said: "These licensed financial professionals are required by law and our policies to act in the participants' best interests when providing advice to them. Any suggestion to the contrary is false."

Some retirement plan advisers such as Mr. Dauenhauer have had trouble getting details from providers on some of the underlying managed account incentives.

"They all hide behind [it being a] proprietary business practice," Mr. Dauenhauer said.

Spokespeople for companies mentioned in this article who were reached for comment declined to give specifics regarding incentive compensation.


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