Managed accounts aren't popular default options in 401(k) plans, because fees are too high for plan executives to justify, leaving them concerned about fulfilling their fiduciary responsibility, experts say.
Managed accounts aren't popular default options in 401(k) plans, because fees are too high for plan executives to justify, leaving them concerned about fulfilling their fiduciary responsibility, experts say.
The Pension Protection Act of 2006 encouraged plan sponsors to enroll employees automatically in 401(k) plans.
In October, the Department of Labor said managed accounts — along with target date and balanced funds — are qualified default investment alternatives.
Some industry experts are concerned that plan executives may be subject to litigation to explain additional fees that managed accounts charge.
"Managed-account providers should be worried, and plan sponsors should be concerned," said Richard Glass, president of Investment Horizons Inc., a Pittsburgh defined contribution communications company.
"The majority of target date fund providers keep fees in the [0.5% to 0.7%] range, but with managed accounts, how can they justify all the additional fees?" he said.
Managed-account fees can run as high as 1% of assets.
LITIGATION CONCERNS
How a fiduciary is defined has been turned on its head since the first round of 401(k) fee lawsuits was filed in September 2006, said Mr. Glass.
Some executives think that adding managed accounts as a default option could leave them open to litigation over excessive fees.
Historically, plan executives have fulfilled their fiduciary duties by selecting the providers that have offered the best service at competitive fees, Mr. Glass said.
But that has changed, he said, because of the heightened litigation environment.
Many plan sponsors are turned off by higher managed-account fees, preferring the lower fees for target date funds, said Lori Lucas, Chicago-based DC practice leader for Callan Associates Inc. of San Francisco.
"Plan executives, in this fee environment, want to be careful. I'm not saying managed accounts don't fit for some plans, but many don't like them as a default," she said.
Several Callan clients have added managed accounts as a stand-alone option in their 401(k) plans, but not many have used them as default options, Ms. Lucas said.
"We see a lot of them come to us and ask about managed accounts as just one option, not the default. We're seeing more of that," Ms. Lucas said.
Many 401(k) plan executives are apprehensive about managed-account fees, said Mike Francis, president of Francis Investment Counsel in Pewaukee, Wis.
"I think many plan [executives] see target date funds as the less expensive option, and picking the right default does have something to do with what kind of plan you have," he said.
"It's a lot different if you are talking about a law firm," where employees tend to make more money, than a manufacturer, where employees tend to make less, Mr. Francis said.
Managed accounts are a valid investment option, but offering them as a default could be problematic, Mr. Glass said.
"If an employee earns $30,000 a year and he's defaulted into a managed-account structure and stays there, how can the sponsor justify that?" he asked.
Managed accounts make more sense for highly compensated employees with larger balances.
The Nebraska Methodist Health System in Omaha opted for target date options as the default for automatically enrolled 401(k) participants in its $200 million 401(k) plan. Plan executives considered using managed accounts as the default option but decided that they didn't make sense for the bulk of members of their work force.
Ryan Husing, director of employee benefits, said target date funds are a safer, more obvious default option than managed ac-counts. "We feel that participants get the best value with target date [funds]. It was an easy decision for us," Mr. Husing said.
Some plan executives think that managed accounts make sense as an option but not as a default.
William F. Quinn, chairman of American Beacon Advisors of Fort Worth, Texas, which oversees American Airlines' $12.1 billion 401(k) plan, said the plan in January added managed accounts provided by Financial Engines Inc. of Palo Alto, Calif.
American is using them as an option but not as the default because managed accounts make sense for employees with higher balances, which can offset fees.
One plan that uses managed accounts as its default option is the $255 million 401(k) plan of Standard Register Co. in Dayton, Ohio. The company uses Financial Engines too.
Richard Mayer, director of benefits, said managed accounts are a great way for less financially savvy investors to manage their retirement assets. He declined to comment further.
Managed-account providers, for the most part, aren't concerned.
Financial Engines and Chicago-based ProManage Inc., two of the largest managed-account providers, have very different fee structures.
'VERY COMPETITIVE'
Christopher Jones, executive vice president of investment management and chief investment officer at Financial Engines, said that the firm's average managed-account fee is about 0.6%.
"To say that managed accounts are more expensive than target date funds is not quite fair," he said.
"Depending on how they are set, [fees] can range from [0.35% to 0.6%]," Mr. Jones said. "I can't speak about other [managed-account] providers, but we are very competitive with target date funds."
Financial Engines has 10 default-plan clients where employees could opt out if they choose.
"Fees are a very significant issue with 401(k) plans in general. We recognize that sponsors are fee-sensitive," Mr. Jones said.
"We take advantage of institutionally priced investments. With life cycle funds, the fees are bundled," Mr. Jones said.
"In the managed-account world, you see all the underlying fees."
Tony Sabos, president of ProManage, said the firm's fees of up to 0.6% are very competitive with target date funds. And the safe harbor provided in the QDIA regulations ease the concerns of plan sponsors.
