Archive Links

Consumer Archive
CU System Archive
Market Archive
Products Archive
Washington Archive

News Now

August 20, 2014

Retirees: GAO finds managed account fees offset gains

Consumer
NEW YORK (8/19/14)--Any retiree wants the best return on retirement accounts. But trying to achieve strong returns by using managed investment accounts could backfire, according to a new Government Accountability Office (GAO) report (Marketwatch Aug. 5).
 
Managed accounts involve professionals making decisions about what vehicles the products invest in, versus passive investing that tracks common indices such as the Dow or a market sector such as small cap funds. That hands-on management requires investors to pay higher fees, which may offset some or all of the gains. The GAO report looked at eight managed account providers accounting for 95% of the market.
 
Since regulatory changes in 2007 gave employers the OK to automatically enroll 401(k) participants into managed accounts, these kinds of investments have become more popular, offered in 36% of plans in 2012, up from 25% in 2005. Many observers think the plans will only become more popular as baby boomers approach retirement, a time when many workers turn to the more tailored advice managed accounts offer.
 
The GAO observed that fees for managed accounts--fees in addition to the expense ratios participants already pay to invest in mutual funds--range widely, from nothing to as much as 1% of the account balance each year. As a result of the added fees, the GAO found that "401(k) participants who do not [consistently] receive higher investment returns from the managed account services risk losing money over time."
 
Some managed account providers claim the funds earn a bonus of as much as three percentage points a year. But the GAO study, citing Vanguard data, reported that "published returns for managed account participants" were "generally less than or equal to returns" of other popular 401(k) investments, including target date funds or balanced funds invested in a mix of stocks and bonds.
 
In addition, the GAO study noted a lack of standards allowing consumers to compare managed account performance with that of other 401(k) investments, leaving investors with no way to accurately size up an investment. The GAO report also noted that the Labor Department, the 401(k) plan regulator, does not mandate disclosure of performance benchmarking for managed accounts, although it does for other 401(k) investments.
 
The report also cited a possible conflict of interest for managed account providers, who may have a financial incentive in recommending that retirees stay in the former employer's 401(k) plan and continue to pay managed account fees. It might be a better choice for retirees to transfer assets to an annuity or individual retirement accounts, the GAO report noted.
 
The report noted, too, that some managed account providers might not serve as fiduciaries; a fiduciary must make decisions based on what's financially best for you and also has to disclose any possible conflict of interest. The Credit Union National Association's Home & Family Finance Resource Center has reported that, "Three-fourths of investors incorrectly believe that financial advisers are fiduciaries and two-thirds wrongly believe stockbrokers are fiduciaries ... That ignorance can be costly."
 
The Labor Department requires a managed account provider to act as a fiduciary, and assume liability for flawed advice, when participants are enrolled automatically in these accounts. But if participants opt in to managed accounts, the rules do not "have a similar explicit requirement," according to the GAO report. "[S]ome providers may actively choose to structure their services to limit their fiduciary liability," the report noted.
 
For related information, read "Making Dollars and Sense of Financial Planner Designations" and "Your 401(k) Manager Not Always Best Adviser" in the Home & Family Finance Resource Center. ReadMore
RSS print
News Now LiveWire
Housing starts swell in July #NewsNow #Market http://t.co/EdKIhXEj9l
11 hours ago
Consumer inflation tapers after spring surge #NewsNow #Market http://t.co/bgvQd8fyuF
12 hours ago
Have you read this one today in #NewsNow? What NCUA examiners look for on cybersecurity efforts: NCUA Report http://t.co/4g5wUavUAe
13 hours ago
.@CFPB sets $2.75M fine v. auto finance co. it says "distorted consumer credit records for years": TX-based First Investors Fin. Serv. Group
13 hours ago
University, college #creditunions add fin ed to higher ed. See #NewsNow http://t.co/NsyshwHPhg
15 hours ago