Byline: Jenna Gottlieb
Managed accounts are not 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 automatically enroll employees in 401(k) plans. In October, the Labor Department said managed accounts - along with target-date and balanced funds - are qualified default investment options.
Some industry experts are concerned that plans executives may be subject to litigation to explain additional fees that managed accounts charge.
Said Richard Glass, president of Investment Horizons Inc., a Pittsburgh defined contribution communications company: 'Managed account providers should be worried. And plan sponsors should be concerned. The majority of target-date fund providers keep fees in the 50- to 70-basis-point range, but with managed accounts, how can they justify all the additional fees?'' Managed account fees can run as high as 100 basis points.
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 believe adding managed accounts as a default option could leave them open to litigation over excessive fees.
Historically, plan executives fulfilled their fiduciary duties by selecting providers that offer the best service at competitive fees, said Mr. Glass. But that has changed, he said, because of the heightened litigation environment.
Lori Lucas, Chicago-based defined contribution practice leader for Callan Associates Inc., San Francisco, said many plan sponsors are turned off by higher managed account fees, preferring the lower fees for target-date funds.
'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.
Not many used as defaults
Several Callan clients have added managed accounts as a standalone option in their 401(k) plans, but not many have used them as default options, said Ms. Lucas.
'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,'' said Ms. Lucas.
Mike Francis, president of Francis Investment Counsel, Pewaukee, Wis., said many 401(k) plan executives are apprehensive about managed account fees. '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. 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, said Mr. Francis.
Managed accounts are a valid investment option, but offering them as a default could be problematic, said Mr. Glass.
'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?'' Mr. Glass asked. Managed accounts make more sense for highly compensated employees with larger balances.
Nebraska Methodist Health System, 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 did not make sense for the bulk of their workforce.
Ryan Husing, director of employee benefits, said target-date funds are a safer, more obvious default option than managed accounts. 'We feel that participants get the best value with target-date (funds). It was an easy decision for us,'' said Mr. Husing.
Some plan executives believe managed accounts make sense as an option, but not a default.
William F. Quinn, chairman of American Beacon Advisors, Fort Worth, Texas, which oversees American Airlines' $12.1 billion 401(k) plan, said the plan added managed accounts provided by Financial Engines in January. 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., Dayton, Ohio. Standard Register 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 further comment.
Not concerned
Managed account providers, for the most part, are not concerned.
Financial Engines and ProManage Inc., Chicago, two of the largest managed account providers, have very different fee structures.
Christopher Jones, executive vice president of investment management and chief investment officer at Financial Engines, said the firm's average managed account fees are around 60 basis points.
'To say that managed accounts are more expensive than target date funds is not quite fair. Depending on how they are set, (fees) can range from 35 to 60 basis points. I can't speak about other (managed account) providers, but we are very competitive with target-date funds,'' said Mr. Jones.
'Fees are a very significant issue with 401(k) plans in general. We recognize that sponsors are fee-sensitive. We take advantage of institutionally priced investments. With lifecycle funds, the fees are bundled. In the managed account world, you see all the underlying fees.''
Tony Sabos, president of ProManage, said the firm's fees of up to 60 basis points are very competitive with target-date funds. And the safe harbor provided in the QDIA regulations ease the concerns of plan sponsors.
CAPTION(S):
Richard Glass feels managed account fees are too high for most workers.
