Managed Accounts in Other Workplace Defined Contribution Plans and Individual Retirement Accounts (IRAs) As managed accounts have gained popularity in 401(k) plans, there are indications that they may also be gaining popularity in government and non-profit workplace retirement savings plans, commonly referred to as 457 or 403(b) plans. Many of the providers we spoke to that offer managed accounts to 401(k) plans also offer services to other plans like these. In addition, some providers are starting to offer managed accounts in IRAs, and in particular rollover IRAs—when participants separate from their employer they may decide to roll their funds into an IRA. One of these providers noted that it is easier to engage participants who use managed accounts through products such as IRAs, and there is more flexibility with investment options, even though the provider’s marketing costs may be higher. Under Title I of the Employee Retirement Income Security Act of 1974 (ERISA), as amended, employers are permitted to sponsor defined contribution plans in which an employee’s retirement savings are based on contributions and the performance of the investments in individual accounts. Typically, 401(k) plans—the predominant type of defined contribution plan in the United States—allow employees who participate in the plan to specify the size of their contributions and direct their assets to one or more investments among the options offered within the plan. Investment options generally include mutual funds, stable value funds, company stock, and money market funds. To help participants make optimal investment choices, an increasing number of plans are offering professionally managed allocations—including managed accounts—in their 401(k) plan lineups. Managed accounts are investment services under which providers make investment decisions for specific participants to allocate their retirement savings among a mix of assets they have determined to be appropriate for the participant based on their personal information. As shown in figure 1, managed accounts were first offered to 401(k) plans around 1990, but most providers did not start offering them until after 2000. Managed accounts differ from other professionally managed allocations, such as target date funds and balanced funds, in several key ways. Target date funds (also known as life cycle funds) are products that determine an asset allocation that would be appropriate for a participant of a certain age or retirement date and adjust that allocation so it becomes more conservative as the fund approaches its intended target date. Target date funds do not place participants into an asset allocation; instead, participants generally self-select into a target date fund they feel is appropriate for them based on the fund’s predetermined glide path that governs asset allocation. Balanced funds are products that generally invest in a fixed mix of assets (e.g., 60 percent equity and 40 percent fixed income assets). While target date funds manage the fund to reach a target date, managed accounts may consider other, more personalized factors such as a participant’s stated risk tolerance, even though they are not required to do so. As shown in figure 2, managed accounts may offer higher levels of personalization than other types of professionally managed allocations. Managed accounts are generally considered to be an investment service—not one of the plan’s investment options—while target date funds are considered to be investment options. In the latter, participants can invest all or a portion of their 401(k) plan contributions in a target date fund, but generally cannot directly invest in a managed account. Instead, the role of the participant is to enroll in the managed account service, or be defaulted into it, generally relinquishing their ability to make investment decisions unless they disenroll from, or opt out of, the managed account. As shown in figure 3, managed account providers decide how to invest contributions, generally among the investment options available in a 401(k) plan, and then manage these investments over time to help participants reach their retirement savings goals. By comparison, participants not enrolled in a managed account have to make their own decisions about how to invest their 401(k) plan contributions. DOL’s Employee Benefits Security Administration (EBSA) is the primary agency through which Title I of ERISA is enforced to protect private pension plan participants and beneficiaries from the misuse or theft of their pension assets. To carry out its responsibilities, EBSA issues regulations and guidance; investigates plan sponsors, fiduciaries, and service providers; seeks appropriate remedies to correct violations of the law; and pursues litigation when it deems necessary. As part of its mission, DOL is also responsible for assisting and educating plan sponsors to help ensure the retirement security of workers and their families. In 2007, DOL designated certain managed accounts as one type of investment that may be eligible as a qualified default investment alternative (QDIA) into which 401(k) plan fiduciaries may default participants who do not provide investment directions with respect to their plan contributions. DOL designated three categories of investments that may be eligible as QDIAs if all requirements of the QDIA regulation have been satisfied—these categories generally include: (1) an investment product or model portfolio that is designed to become more conservative as the participant’s age increases (e.g., a target date or lifecycle fund); (2) an investment product or model portfolio that is designed with a mix of equity and fixed income exposures appropriate for the participants of the plan as a whole (e.g., a balanced fund); and (3) an investment management service that uses investment alternatives available in the plan and is designed to become more conservative as the participant’s age increases (e.g., a managed account). DOL regulations indicate that plan fiduciaries who comply with the QDIA regulation will not be liable for any loss to participants that occurs as a result of the investment of their assets in a QDIA, including investments made through managed account arrangements that satisfy the conditions of the QDIA regulation. However, plan fiduciaries remain responsible for the prudent selection and monitoring of any QDIA offered by the plan. To obtain relief, plan fiduciaries must provide participants with advance notice of the circumstances under which plan contributions or other assets will be invested on their behalf in a QDIA; a description of the QDIA’s investment objectives, risk and return characteristics, and fees and expenses; and the right of participants to opt out of the QDIA, among other things. A 2012 survey of defined contribution plan sponsors by PLANSPONSOR indicated that managed accounts were used as a QDIA less than 5 percent of the time. Managed accounts are also offered as opt-in services by over 30 percent of defined contribution plan sponsors. Managed accounts can be offered as both QDIA and opt-in services, allowing the plan sponsor to choose which services to offer their participants. Plan fiduciaries who offer managed account services only to participants who affirmatively elect to use the service (i.e., on an opt-in basis), rather than by default, are not required to comply with the QDIA regulation, although such fiduciaries still are subject to the general fiduciary obligations under ERISA with respect to the selection and monitoring of a managed account service for their plan. Plan sponsors, including those who offer managed account services in their 401(k) plans, are required to issue a variety of informational disclosures and notices to plan participants and beneficiaries at enrollment, on a quarterly and annual basis, and when certain triggering events occur. These disclosures—often referred to as participant-level disclosures—when made in accordance with regulatory requirements, help ensure that plan participants have access to the information they need to make informed decisions about their retirement investments. In addition, when a plan sponsor chooses to default participants into managed accounts as a QDIA, the sponsor must inform participants of this decision annually through a number of specific disclosures, based on the plan’s design. The QDIA disclosures, when made in accordance with regulatory requirements, provide relief from certain fiduciary responsibilities for sponsors of 401(k) plans. Service providers that provide managed account services to a plan may be required to provide certain disclosures about the compensation they will receive to plan sponsors offering a managed account service under different DOL disclosure requirements. These disclosures—often referred to as service provider disclosures—are intended to provide information sufficient for sponsors to make informed decisions when selecting and monitoring service providers for their plans. DOL’s final rule on these disclosures requires service providers to furnish sponsors with information to help them assess the reasonableness of total compensation paid to providers, to identify potential conflicts of interest, and to satisfy other reporting and disclosure requirements under Title I of ERISA, including the regulation governing sponsor’s disclosure to participants. Managed account provider roles may differ from those of other plan service providers. As shown in figure 4, when a plan sponsor decides to offer participants a managed account service, other entities may contribute to its implementation and operation. Some record keepers and intermediary service providers refer to themselves as “managed account providers” because they make this service available to participants, but they do not ultimately decide how to invest participant contributions. Similarly, even though target date fund managers or collective investment trust managers may select an overall asset allocation strategy and investments to fit that strategy for the funds they offer to 401(k) plan participants, these managers also do not ultimately decide how to invest participant accounts. Plan sponsors are typically the named fiduciaries of the plan. Managed account providers and record keepers may also be fiduciaries, depending on their roles and the services they provide. Fiduciaries are required to carry out their responsibilities prudently and solely in the interest of the plan’s participants and beneficiaries. Plan service providers that have investment discretion or provide investment advice about how to invest participant accounts generally may be “3(38) Investment Manager” fiduciaries or “3(21) Investment Adviser” fiduciaries. A 3(38) Investment Manager fiduciary can only be a bank, an insurance company, or a Registered Investment Adviser (RIA).