Service providers that provide managed account services to a plan may  be required to provide certain disclosures about the compensation they  will receive to plan sponsors offering a managed account service under  different DOL disclosure requirements. The eight providers in our case  studies use different investment options, employ varying strategies to  develop and adjust asset allocations for participants, incorporate varying  types and amounts of participant information, and rebalance participant  accounts at different intervals. Absent explicit requirements or additional guidance  from DOL, some managed account providers may choose to structure the  services they provide to limit their fiduciary liability, which could ultimately  provide less liability protection for sponsors for the consequences of  provider investment management choices. Managed Accounts Offer Advantages for Some Participants, But Fees and Lack of Standardized Reporting Requirements from DOL Can Offset These Advantages

		Various Industry Representatives Report that Managed Accounts Can Provide a Number of Advantages for Participants

			Increase Diversification

Some managed account providers and plan sponsors have said that  increased diversification of retirement portfolios is the main advantage of  the managed account service for 401(k) plan participants. The additional managed account fees, which are charged to participants  over and above investment management and administrative fees, can  vary substantially, and as a result, some participants pay no fees, others  pay a flat fee each year, and still others pay a comparatively large  percentage of their account balance for generally similar services from  managed account providers. One managed  account provider charges a flat rate and fees for the other seven  providers ranged from 0.08 to 1 percent of the participant’s account  balance annually, or $8 to $100 on every $10,000 in a participant’s  account. By requiring sponsors to  provide participants with performance data and benchmarking information  for 401(k) investments, DOL intends to reduce the time required for  participants to collect and organize fee and performance information and  increase participants’ efficiency in choosing investment options that will  provide the highest value. Without performance  and benchmarking information presented in a format designed to help  participants compare and evaluate their managed account, participants  cannot make informed decisions about the managed account service. However, absent DOL requirements that plan  sponsors use standard metrics to report on the performance of managed  accounts for participants who are defaulted into the service as a QDIA, it  would be potentially difficult for these participants to evaluate the effect  that additional fees could have on the performance of their managed  accounts, including how the additional fees could affect returns and  retirement account balances, possibly eroding the value of the service  over time for those participants. The absence  of similar guidance specific to managed accounts has led to inconsistency  in sponsors’ procedures for selecting and overseeing providers and may  inhibit their ability to select a provider who offers an effective service for a  reasonable fee. In  addition, even though participants generally pay an additional fee for  managed account services, not all of the sponsors we interviewed said  that they monitor fees. DOL maintains that sponsors need this information  in order to make better decisions when selecting and monitoring providers  for their plans. However, DOL regulations generally do not require  managed account providers to furnish sponsors with performance and  benchmarking information for managed accounts because, as previously  noted, managed accounts are not considered to be designated  investment alternatives. Without this information, sponsors cannot  effectively compare different providers when making a selection or  adequately determine whether their managed account offerings are  having a positive effect on participant retirement savings, as they can  currently determine with the designated investment alternatives available  in the plan. To help sponsors who offer managed account services or who are  considering doing so better protect their 401(k) plan participants, we  recommend that the Secretary of Labor direct the Assistant Secretary for  EBSA to:  c)  Provide guidance to plan sponsors for selecting and overseeing  managed account providers that addresses: (1) the importance of  considering multiple providers when choosing a managed account  provider, (2) factors to consider when offering managed accounts  as a QDIA or on an opt-in basis, and (3) approaches for  evaluating the services of managed account providers. As  stated in its letter, DOL agreed with our recommendations and will  consider each of them as it moves forward with a number of projects. Providing guidance to sponsors for  selecting and overseeing managed account providers, as suggested by  our third recommendation, may help sponsors understand their fiduciary  responsibilities with respect to managed accounts. We reviewed relevant research and federal laws,  regulations, and guidance on managed accounts in 401(k) plans. According to our estimates,  the eight managed account providers we included in the case studies  represented over 95 percent of the managed account industry in defined  contribution plans, as measured by assets under management in 2013. Semi-Structured Interviews with Plan Sponsors

To identify the advantages and disadvantages of managed accounts for  401(k) plan participants and any challenges sponsors face in selecting  and overseeing managed account providers, we conducted semi- structured interviews with 12 plan sponsors.
Why GAO Did This Study

401(k) plan sponsors have increasingly offered participants managed accounts— services under which providers manage participants' 401(k) savings over time by making investment and portfolio decisions for them. These services differ from investment options offered within 401(k) plans. Because little is known about whether managed accounts are advantageous for participants and whether sponsors understand their own role and potential risks, GAO was asked to review these services.
GAO examined (1) how providers structure managed accounts, (2) their advantages and disadvantages for participants, and (3) challenges sponsors face in selecting and overseeing providers. In conducting this work, GAO reviewed relevant federal laws and regulations and surveyed plan sponsors. GAO interviewed government officials, industry representatives, other service providers, and 12 plan sponsors of varying sizes and other characteristics. GAO also conducted case studies of eight managed account providers with varying characteristics by, in part, reviewing required government filings.

What GAO Found

GAO's review of eight managed account providers who, in 2013, represented an estimated 95 percent of the industry involved in defined contribution plans, showed that they varied in how they structured managed accounts, including the services they offered and their reported fiduciary roles. Providers used varying strategies to manage participants' accounts and incorporated varying types and amounts of participant information. In addition, GAO found some variation in how providers reported their fiduciary roles. 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 Department of Labor (DOL) requires managed account providers who offer services to defaulted participants to generally have the type of fiduciary role that provides certain levels of fiduciary protection for sponsors and assurances to participants of the provider's qualifications. DOL does not have a similar explicit requirement for providers who offer services to participants on an opt-in basis. Absent explicit requirements from DOL, some providers may actively choose to structure their services to limit the fiduciary liability protection they offer.
According to providers and sponsors, participants in managed accounts receive improved diversification and experience higher savings rates compared to those not enrolled in the service; however, these advantages can be offset by paying additional fees over time. Providers charge additional fees for managed accounts that range from $8 to $100 on every $10,000 in a participant's account. As a result, some participants pay a low fee each year while others pay a comparatively large fee on their account balance. Using the limited fee and performance data available, GAO found that the potential long-term effect of managed accounts could vary significantly, sometimes resulting in managed account participants paying substantial additional fees and experiencing lower account balances over time compared to other managed account participants. Further, participants generally do not receive performance and benchmarking information for their managed accounts. Without this information, participants cannot accurately evaluate the service and make effective decisions about their retirement investments. Even though DOL has required disclosure of similar information for 401(k) plan investments, it generally does not require sponsors to provide this type of information for managed accounts.
Sponsors are challenged by insufficient guidance and inconsistent performance information when selecting and overseeing managed account providers. DOL has not issued guidance specific to managed accounts on how sponsors should select and oversee providers, as it has done for other funds. GAO found that the absence of guidance for managed accounts has led to inconsistency in sponsors' procedures for selecting and overseeing providers. Without better guidance, plan sponsors may be unable to select a provider who offers an effective service for a reasonable fee. In addition, DOL generally does not require providers to furnish sponsors with performance and benchmarking information for managed accounts, as it does for investments available in a plan, although some providers do furnish similar information. Without this information, sponsors cannot effectively compare providers when making a selection or determine whether managed accounts are positively affecting participants' retirement savings.

What GAO Recommends

Among other things, GAO recommends that DOL consider provider fiduciary roles, require disclosure of performance and benchmarking information to plan sponsors and participants, and provide guidance to help sponsors better select and oversee managed account providers. In response, DOL agreed with GAO's recommendations and will consider changes to regulations and guidance to address any issues.