United States: GAO Report Shines Spotlight On Key Issues For Managed Accounts In 401(K) Plans

Most professionals who work in the 401(k) arena would agree that managed accounts are, on balance, a favorable development for 401(k) plan participants. However, such accounts are, in many ways, still in their infancy, relatively speaking. A report issued by the United States Government Accountability Office (the "GAO") in June titled "401(k) Plans – Improvements Can Be Made to Better Protect Participants in Managed Accounts" (the "Report") provided a helpful discussion on the current status and likely future for the rules governing managed accounts.


In 2007, the Department of Labor issued regulations that favored certain managed accounts which could be used as qualified default investment alteratives ("QDIAs") in 401(k) and other participant-directed defined contribution plans.  The GAO report estimates that such plans now hold over $100 billion in managed accounts.

According to the GAO, "managed accounts" are broadly defined as an investment service pursuant to which investment decisions are made for specific participants to allocate assets, among a mix of investments determined to be appropriate for the participants based on their own personal information. By contrast, target date (or life cycle) funds are defined by the GAO as investment products that determine an asset allocation for a participant based on factors such as age or expected retirement date, and that adjust the asset allocation as the target date approaches and, for some funds, is passed.  Finally, the GAO defines balanced funds as investment products that generally invest in a fixed mix of assets (such as 60 percent equity and 40 percent fixed income) that, perhaps, is adjusted to reflect a participant's personal situation.

In other words, the GAO views target date funds and balanced funds as one of a plan's investment options, just like any mutual fund or similar investment choice that may be available under the plan. A managed account, however, is viewed as the service whereby a (typically) external provider makes the investment allocation decisions for the plan participants amongst the various investment option otherwise available under the plan. The GAO acknowledges the existence of custom target date funds, which have attributes similar to managed accounts in that the provider allocates a participant's investments among existing plan options to create the mix of assets deemed appropriate for the participant's age and objectives.

The GAO reviewed the offerings of eight providers of these types of investment management services and estimated that those providers represent over 95% of the managed account industry in defined contribution plan (as measured by assets under management in 2013). They identified these broad areas of concern, which are discussed in more detail below, along with my key take-aways for plan sponsors.

1. Providers structure managed accounts differently, which can harm participants.

The GAO observed that the eight providers used different investment options, different investment strategies, and different approaches to the use of participant information, and rebalanced at different intervals. As a result, "participants with similar characteristics in different plans may have differing experiences." (Report p. 14). Most plan sponsors would probably not be surprised to learn that different providers have different approaches which will lead to different results. The real issue for the appropriate plan fiduciary is to determine which providers and which approaches are prudent for their plan participants. Some of the challenges to making those determinations are discussed later in the GAO report (and this article).

Next, the GAO pointed out that while most managed account advisors serve as ERISA Section 3(38) investment manager fiduciaries, some do not. Instead they may be a mere ERISA Section 3(21) investment advisor fiduciary. The GAO, quoting DOL officials,  noted that when a fiduciary properly appoints (and monitors) a 3(38) investment manager it is generally relieved from responsibility for poor investment decisions made by the investment manager. This is not the case where a 3(21) investment advisor fiduciary is appointed – in that case the appointing fiduciary can be held responsible for poor investment decisions. Plan sponsors should keep this important distinction in mind when hiring a managed account provider.

Finally, the GAO highlighted the fact that when a managed account is offered as a QDIA, the QDIA regulations generally require that the provider be a 3(38) investment manager, but no similar rule applies where managed accounts are provided on an opt-in basis. It is not clear whether the DOL could even change the rules for opt-in accounts, but this is an issue that may be worth following. Another area that the GAO asked the DOL to consider is whether managed account providers may have a disincentive or conflict of interest to advise participants of out of plan options such as rollovers, because it could reduce the amount of assets they manage within the plan.

2. Managed accounts offer advantages for some participants but fees and lack of standardized reporting requirements from DOL can offset these advantages.

Among the advantages cited by the GAO are increased diversification of retirement assets by participants using managed accounts, as well as a correlation with larger contributions (though this may have more to do with automatic enrollment and automatic selection features that are likely more prevalent in plans using managed accounts), and improved access to retirement planning information.

The primary disadvantage cited by the GAO is the additional fee that a participant must pay for managed account services. It is unclear whether the "value" of the services received for the fee should be based on a comparison to the return, net of fees, that the average participant would have obtained it if such participant self-directed his or her 401(k) plan investments, or if a better comparison is to the fees charged by other professionally managed investment accounts. However, given the high visibility paid to plan fees, particularly by the plaintiff's bar, plan sponsors may want to consider subsidizing (or fully paying) the managed  account fees charged to plan participants. In any event, plan sponsors should consider working with an outside consultant to do a full review of all fees related to or associated with the managed account services charged by the record keeper or managed account provider.

The other disadvantage is that the DOL guidance generally does not require most managed accounts to satisfy the disclosure rules that apply to "designated investment alternatives" (such as mutual funds). The GAO concludes that "Because DOL does not require plan sponsors to provide participants information on the performance of their managed accounts or to compare performance against a set of standard benchmarks, it is potentially difficult for participants to evaluate whether the additional fees for managed accounts are worth paying, considering the effect of fees on returns and retirement account balances. As a result, participants may be unable to effectively assess the overall value of the service and to compare performance against a set of standard benchmarks." (Report p. 45). As discussed in the next section, this is a problem for plan sponsors as well as plan participants. At a minimum, sponsors should work with their outside investment consultant to make sure they understand the fees being charged and are able to come up with some benchmark or other measurement to assess the performance of any managed accounts, and should consider the pros and cons of passing this information along to plan participants even if not legally required to do so.

3. Absent guidance, sponsors face challenges in selecting and overseeing managed account providers.

The GAO indicated concerns regarding plan sponsor access to managed account provider options. This is a big challenge for plan sponsors when working with their record keepers because frequently the only option is a proprietary offering or a third-party who has been pre-selected by the record keeper. Plan sponsors (and their consultants) need to explore the marketplace and engage their record keeper about being able to use a third-party provider of the plan sponsor's choice.

The GAO points out that it is difficult for plan sponsors to select and monitor managed account providers because there are no widely accepted industry benchmarks or other tools for comparing providers. Although similar issues apply for target date funds, the DOL has issued guidance on such funds for plan sponsors (Department of Labor, Employee Benefits Security Administration, Target Date Retirement Funds – Tips for ERISA Plan Fiduciaries (Washington, D.C.:  February 2013). However, it has not issued similar guidance for managed accounts. Until more guidance and better benchmarking becomes available, plan sponsors should work closely with their outside investment consultant so that they can demonstrate that they have acted prudently in selecting (and monitoring) their managed account providers.


The GAO recommended that the DOL:

  • 1. Determine whether conflicts of interest exist for managed account providers who offer services to participants at or near retirement, and to take appropriate action if necessary.
  • 2. Consider the fiduciary status of managed account providers when they offer services on an opt-in basis.
  • 3. Provide guidance to plan sponsors to help them select and monitor managed account providers.
  • 4. Require plan sponsors to request more than one managed account provider option.
  • 5. Amend the participant disclosure regulations to require standardized performance and benchmarking information be provided to plan participants. Additionally, the DOL should amend the service provider disclosure regulations so that plan sponsors could pass along this information.

It should be noted that the DOL has indicated its general agreement with the recommendations. Clearly additional guidance will be forthcoming. Until such guidance is released, plan sponsors should work closely with their outside advisors to make sure they are utilizing best practices in (1) selecting and monitoring their managed fund providers and (2) communicating relevant information regarding managed accounts to their plan participants.

Reprinted with permission from Employee Benefit Review - October 2014

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement

    Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of www.mondaq.com

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at enquiries@mondaq.com.

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions