The retirement recordkeeping landscape has evolved
significantly in recent years. The number of competing providers has declined
dramatically as numerous mergers and acquisitions have consolidated several
firms, and those providers still operating have continued to reduce fees in
order to remain competitive.
It’s also important to note the substantial increase and
broadening scope of fiduciary breach litigation, in which excessive fee
complaints are the most prominent claims. According to JP Morgan, more than 275
such lawsuits have been filed since 2006, with nearly 100 of those filed in
2020 alone. It seems reasonable to assume that each of these factors has played
a role in the compression of provider fees.
While lower fees can generally be viewed as a positive
development, recordkeepers may have less incentive to continue to invest in
improved technology, better education, or other enhanced capabilities in an
environment of wafer-thin profit margins.
As the old model adding to revenue through proprietary
investment products has become less prevalent, many industry professionals fear
that recordkeepers will be forced to monetize relationships in other ways. One
area of growing popularity has been managed account services.
Managed account programs are platforms that provide
participant investment advice, often formulated in a “robo-advisory” model
through a computer algorithm that matches participant data to a proscribed
investment allocation. Plan participants who opt into the service will incur an
additional fee, generally paid directly from their account. These services are
often promoted as a superior, professionally managed alternative to target-date
While target-date funds consider only a common time horizon,
managed accounts may factor in the participant’s age, financial circumstances,
assets held outside of the retirement plan, and other unique information to
customize the portfolio. Many managed account services also include retirement
planning tools to assist participants in calculating contribution rates
necessary to reach their unique retirement income goals.
While all of this can sound like a great benefit to
participants, there is something of a catch: the cost. Participants pay a
substantial fee for this service, typically a percentage of the account’s
value, in addition to the expense of the underlying funds selected as part of
Depending on the service provider and the value of the
account, a managed account can cost 0.15% to 0.65% or more. As a result, some
participants pay a low fee while others pay a comparatively large fee on their
account balance for as long as they are opted into managed account services.
The potential long-term effect of managed accounts on
performance and fees will vary, but the very nature of fund expenses is a
diminished return. Managed account participants pay substantial added fees,
reducing their balances over time unless the performance gain of the service
outpaces the added cost.
Another issue to consider around managed accounts is their
parallel to target-date funds. Target date funds, like managed accounts, were
created to tailor account investments for the “do it for me” participant.
Target date funds provide portfolios based solely on a participant’s
anticipated retirement dates, shifting from stocks to more conservative bonds
as participants get closer to their expected retirement year. Notably, managed
account services will almost never recommend that the participant elect the
target date fund offerings in the plan, even if that may be the most suitable
option given his or her financial situation and age.
Recent fiduciary breach litigation has targeted both the
suitability and fees related to managed accounts. A participant in the Nestle
401(k) plan initiated a class-action lawsuit alleging that, in most instances,
the asset allocation created by the managed account service was not materially
different than that of the lower-cost target-date funds.
Furthermore, the complaint alleges that Nestle defendants
allowed participants to pay an annual fee of 0.50% on the first $100,000, 0.40%
on the next $150,000, and 0.25% on assets greater than $250,000 for managed
account services. When combined with the expenses of the underlying investments
used by the managed account, the costs far exceed the expenses of a target-date
It’s worth noting that the recordkeeper, not the advice
provider, generally receives a sizable proportion of these fees for
distribution of the services to plan participants, thereby monetizing the
relationship and perhaps creating a direct conflict of interest.
“It remains to be seen whether managed account providers
follow this trend with their fee structures.”
Plan fiduciaries must consider the necessity and
reasonableness of fees when evaluating participant-paid investments and
services. The Nestle lawsuit referenced above calls into question the
necessity, given that materially similar asset allocations are provided to the
participant through both vehicles. Likewise, the complaint questions the
reasonableness of fees and asserts that “the reasonable fee is zero or very
close to zero.”
In fairness to managed account providers, one must
acknowledge the value of retirement planning services and the inclusion of
assets held outside of the plan, which are not considerations of target-date
funds. But fiduciaries must also determine if a variable, asset-based fee
structure is appropriate for a managed account service.
Using the fee schedule described above, a participant with a
$10,000 account balance would pay an annual fee of $50, while a participant
with a $500,000 balance would pay $1,725. Given that the advice for both
accounts is created from the same computer algorithm, is it reasonable for the
participant with the large balance to pay over 30 times more for presumably the
Another trend in the recordkeeping industry is moving from
asset-based fee structures to a per-participant, flat-dollar arrangement. It
remains to be seen whether managed account providers follow this trend with
their fee structures.
While managed accounts may provide a meaningful and valuable
service to certain participants, depending on the unique circumstances, plan
sponsor fiduciaries should carefully consider the necessity, suitability, and
reasonableness of fees when evaluating these services on behalf of all of their
participants. It’s also advisable to monitor the outcome of recently filed litigation
related to managed accounts.
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