The GAO is questioning the advantages of Managed Accounts … and you should too
Sometimes participants in a retirement plan (a 401k or 403b plan) have the opportunity of participating in a Managed Accounts (MA) program where their retirement plan is handled for them, but it generally comes at a hefty price and it is difficult to measure the value, if any, of this added cost. In fact, the U.S. Government Accountability Office (GAO) recently issued a report where they questioned if there were any advantages of Managed Accounts. http://www.gao.gov/products/GAO-14-310
The bottom line is that if anyone is paying for Managed Accounts the answer is almost certainly no, and most Managed Accounts programs come with a hefty price tag.
Part of the issue is what is being managed. Very few MA programs manage the contributions. Most only manage the investments, the least important part of the equation. Closing the Retirement Gap is almost always a function of adding more or contributing more and very seldom is it a function of investing differently. As long as you’re in a diversified fund lineup the investments is not the value add that participants really need. (Unfortunately, way too many dabblers in the 401k marketspace are stockbrokers by heritage and the only value add that they bring is the investment expertise.)
A true MA program manages all aspects of the retirement plan, including how much goes in, were it is invested, and how it is periodically re-balanced. If the MA program incorporates auto-enrollment and auto-escalation (if it periodically nudges participants to save more) then it could add real value. But overwhelmingly most MA programs only manage the investments.
When the GAO conducted their survey they looked at roughly 95% of the MA industry and they found serious cause for concern. One of the primary issues was that MA programs fail to offer appropriate performance and benchmarking. In my own personal experience, I know of at least one MA program where they periodically switch the investments out and then show inaccurate historical returns, showing returns and performance as if that new investment had been in the portfolio for the entire time even though it was just added. This is confusing at best and misleading or fraudulent at worst.
Another related concern is that sometimes those offering the MA also promise some sort of relief of fiduciary liability, offering the ERISA 3(38) Investment Fiduciary, and yet it is the opinion of the GAO that those plans offering the MA solution “could potentially provide less liability protection for plan sponsors.”
Why? Because the added benefit of greater diversification is hardly worth the added cost when many of these programs are priced at an additional 50 or 60 basis points. It is hard to justify this added cost, and by allowing the advisor to offer this program the plan sponsor is allowing the advisor to turn the enrollment meeting into a sales meeting, selling participants on moving into the MA program where the advisor is compensated. At the very least this poses a serious conflict of interest. After all, the “management” is often simply a computer program model that is hard to justify the additional cost.
The GAO is recommending some further guidance from the Department of Labor. But my advice is that plan sponsors shouldn’t wait on the DOL. They should avoid any MA program until further notice from the DOL. http://www.gao.gov/assets/670/664391.pdf
The bottom line is that a Managed Accounts program could add value if …
- It is managing contributions also and not just investments
- It involves a national management firm that spends millions on research rather than a local management team
- It provides accurate historical performance and reporting to participants
- And it cost little if anything for participants to use (and yes, this is possible, because some national firms offer the MA option at no cost)
But let’s be honest. These four tenants represent a rarity in the Managed Accounts world, which is why the GAO is concerned … and you should be too. http://www.plansponsor.com/GAO_Questions_Advantages_of_Managed_Accounts.aspx
Save your money.
Don’t pay for Managed Accounts.
Recent Comments