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10 Steps for Hiring a Managed Accounts Provider


Does your company’s retirement plan offer managed accounts services to participants?


Conceptually, managed accounts sound attractive –simply, an investment management service for retirement plan participants who need help. In its most basic form, this service designs a series of portfolios with varying risk and return characteristics using some or all the investment options offered in a 401(k) or 403(b) plan. Then, the participant who enrolls in the service is matched with a portfolio that is the closest fit for that participant’s needs and risk tolerance based on information collected about the participant regarding their specific goals and circumstances. The portfolio is rebalanced automatically. The participant can provide information to the service as his circumstances and retirement income goals change which may result in being assigned to a different portfolio.


There is a significant amount of insufficient due diligence being performed when fiduciaries select and monitor (or not monitor) the managed accounts services offered to retirement plan participants.


Why is this happening?

Middle Man Effect:the service is usually sold by the record keeper who facilitates the execution of the service, not by the managed accounts service provider.  A middleman can rarely possess the details and intimate knowledge required to thoroughly represent the service.


Features, Not Benefits:  the service is presented with only a review of its features, not its measured and documented benefits to the actual users


Black Box Effect:  the inner-workings and general assumptions of a managed account service provider are a mystery to the average plan sponsor. Skill and knowledge is required to dig into and evaluate the components.


One or None:  some record keepers offer only one service provider, so there is no opportunity to compare services, fees and outcomes


Ninth Inning:  during a record keeper search, the service is presented as a minor portion of the participant service package.  At this stage, the fiduciaries are often tired and ready to move on.


Focus on Fee:  when there is no pre-determined set of criteria for evaluation, it is easy to focus only on the fee, rather than value received relative to the fee.


Example: In a study conducted by the U.S General Accountability Office (2013), 10 plan sponsors that offered managed accounts to participants were asked how they arrived at their decision.  Nine out of ten considered fees, but only 2 out of 10 considered the quality of services compared to other providers. 


Are fiduciaries at risk for hiring a managed accounts service provider without engaging in a prudent process?   Although there are no Department of Labor guidelines on how to select a managed accounts provider, the selection remains a fiduciary decision.  It is up to the fiduciary and its investment advisor to establish criteria for evaluation and ask the pertinent questions.


How to improve the process:

  1. Have a separate process and time frame for the managed accounts decision

  2. Find out what employees want and willingness to pay

  3. Establish evaluation criteria

  4. Ask for a presentation and Q&A with the service provider

  5. Ask for a demo using hypothetical participants with varying circumstances and ages

  6. Compare demo’s resulting portfolios to the allocation of an age-appropriate target date fund

  7. Ask for the historically documented benefits to service’s users

  8. Open the black box and find out more about the assumptions and how portfolios are determined

  9. Compare to other service providers (even if there is only one offered)

  10. Engage a qualified retirement plan advisor to guide you and do the heavy lifting


Even if there was no fiduciary duty attached to the managed accounts decision, the nature of the service and its impact on employees calls for an evaluation that reaches far beyond a fee comparison.


Not all managed accounts providers will respond to everything you ask for, but they need to realize that prudent fiduciaries and their advisers are beginning to expect more data and access than provided in the past.


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