No plan sponsor wants his or her company in the headlines for being sued for how their company’s 401(k) plan was improperly managed!
Yet, it is becoming more and more frequent to see these types of stories in the news. One area that plan sponsors should carefully review and audit in detail is fees charged on managed accounts—a service increasingly utilized as the default investment option in plans that creates a custom allocation for participants based on a wide variety of data points (i.e. age, income, savings rate, etc.)
What went wrong?
So what went wrong for these companies that are being sued? In looking at the lawsuits, it is clear that many plan sponsors don’t fully understand the fees being charged to their retirement plans in general, and this is only compounded when it comes to dealing with managed accounts.
Why are managed accounts a common stumbling block? Because plan sponsors are often under the false assumption that since participants sign individual agreements with the managed account provider, the sponsor then has no fiduciary responsibility to assess fees as long as they are disclosed clearly to participants. However, plan sponsors must review every fee being charged, including those charged by managed account providers directly to participants.
Because managed accounts are set up to provide a customized investment mix for an individual, the fees associated with these accounts tend to be high; ranging from 0.40% to 1.00% on top of the underlying investment and plan administration costs. Higher fees for a better solution that provides participants with added value are not immediately bad or imprudent, however, managed accounts can only customize the allocation for the individual participant to the extent participants provide relevant data. If participants do not input the necessary data to take advantage of the managed account, then the higher fees are likely being paid for no added benefit.
Identifying the right fit
By contrast, if you have participants that aren’t engaging with the managed account solution—by providing relevant data, such as age, income, life expectancy, and savings rates—you may find that the target-date fund approach might be a better fit as they aren’t taking advantage of the benefits the higher-cost managed account can provide.
One way to help improve participant engagement is to require participants to opt-in to a managed account platform which would give you, as a sponsor, the opportunity to underline the fees involved as well as the less expensive options available to your participants.
You should also ensure a clear breakdown of fees in is being provided to participants in quarterly statements and it’s important to educate participants that managed accounts charge a higher fee.
Keep an eye on conflicts of interest
One final aspect plan sponsors should monitor is the conflicts of interest that can arise between recordkeepers and managed account providers. Oftentimes recordkeepers will lower their administration fees if a certain managed account solution is included. Plan sponsors should consider why and how they’re able to do this. The answers to these two questions are critical for plan sponsors to be able to answer to ensure they keep the plan running at a reasonable cost and to mitigate the risks that have tripped up other plan sponsors.
BerganKDV has a team of advisors to help plan sponsors understand the complex world of retirement plans by helping with 401(k) design, fiduciary governance, benchmarking 401(k) fees, educating participants and investment due diligence. Want to learn more about what we can do for you? Let’s have a conversation!
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The views expressed are those of BerganKDV Wealth Management. They are subject to change at any time. These views do not necessarily reflect the opinions of any other firm. Investment advisory services and fee-based planning offered through BerganKDV Wealth Management, an SEC Registered Investment Advisor.