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United States Government Accountability Office: 
GAO: 

Report to the Ranking Member, Committee on Education and the 
Workforce, House of Representatives: 

June 2014: 

401(K) Plans: 

Improvements Can Be Made to Better Protect Participants in Managed 
Accounts: 

GAO-14-310: 

GAO Highlights: 

Highlights of GAO-14-310, a report to the Ranking Member, Committee on 
Education and the Workforce, House of Representatives. 

Why GAO Did This Study: 

401(k) plan sponsors have increasingly offered participants managed 
accounts-—services under which providers manage participants' 401(k) 
savings over time by making investment and portfolio decisions for 
them. These services differ from investment options offered within 
401(k) plans. Because little is known about whether managed accounts 
are advantageous for participants and whether sponsors understand 
their own role and potential risks, GAO was asked to review these 
services. 

GAO examined (1) how providers structure managed accounts, (2) their 
advantages and disadvantages for participants, and (3) challenges 
sponsors face in selecting and overseeing providers. In conducting 
this work, GAO reviewed relevant federal laws and regulations and 
surveyed plan sponsors. GAO interviewed government officials, industry 
representatives, other service providers, and 12 plan sponsors of 
varying sizes and other characteristics. GAO also conducted case 
studies of eight managed account providers with varying 
characteristics by, in part, reviewing required government filings. 

What GAO Found: 

GAO's review of eight managed account providers who, in 2013, 
represented an estimated 95 percent of the industry involved in 
defined contribution plans, showed that they varied in how they 
structured managed accounts, including the services they offered and 
their reported fiduciary roles. Providers used varying strategies to 
manage participants' accounts and incorporated varying types and 
amounts of participant information. In addition, GAO found some 
variation in how providers reported their fiduciary roles. One of the 
eight providers GAO reviewed had a different fiduciary role than the 
other seven providers, which could ultimately provide less liability 
protection for sponsors for the consequences of the provider's 
choices. The Department of Labor (DOL) requires managed account 
providers who offer services to defaulted participants to generally 
have the type of fiduciary role that provides certain levels of 
fiduciary protection for sponsors and assurances to participants of 
the provider's qualifications. DOL does not have a similar explicit 
requirement for providers who offer services to participants on an opt-
in basis. Absent explicit requirements from DOL, some providers may 
actively choose to structure their services to limit the fiduciary 
liability protection they offer. 

According to providers and sponsors, participants in managed accounts 
receive improved diversification and experience higher savings rates 
compared to those not enrolled in the service; however, these 
advantages can be offset by paying additional fees over time. 
Providers charge additional fees for managed accounts that range from 
$8 to $100 on every $10,000 in a participant's account. As a result, 
some participants pay a low fee each year while others pay a 
comparatively large fee on their account balance. Using the limited 
fee and performance data available, GAO found that the potential long-
term effect of managed accounts could vary significantly, sometimes 
resulting in managed account participants paying substantial 
additional fees and experiencing lower account balances over time 
compared to other managed account participants. Further, participants 
generally do not receive performance and benchmarking information for 
their managed accounts. Without this information, participants cannot 
accurately evaluate the service and make effective decisions about 
their retirement investments. Even though DOL has required disclosure 
of similar information for 401(k) plan investments, it generally does 
not require sponsors to provide this type of information for managed 
accounts. 

Sponsors are challenged by insufficient guidance and inconsistent 
performance information when selecting and overseeing managed account 
providers. DOL has not issued guidance specific to managed accounts on 
how sponsors should select and oversee providers, as it has done for 
other funds. GAO found that the absence of guidance for managed 
accounts has led to inconsistency in sponsors' procedures for 
selecting and overseeing providers. Without better guidance, plan 
sponsors may be unable to select a provider who offers an effective 
service for a reasonable fee. In addition, DOL generally does not 
require providers to furnish sponsors with performance and 
benchmarking information for managed accounts, as it does for 
investments available in a plan, although some providers do furnish 
similar information. Without this information, sponsors cannot 
effectively compare providers when making a selection or determine 
whether managed accounts are positively affecting participants' 
retirement savings. 

What GAO Recommends: 

Among other things, GAO recommends that DOL consider provider 
fiduciary roles, require disclosure of performance and benchmarking 
information to plan sponsors and participants, and provide guidance to 
help sponsors better select and oversee managed account providers. In 
response, DOL agreed with GAO's recommendations and will consider 
changes to regulations and guidance to address any issues. 

View [hyperlink, http://www.gao.gov/products/GAO-14-310]. For more 
information, contact Charles Jeszeck at (202) 512-7215 or 
jeszeckc@gao.gov. 

[End of section] 

Contents: 

Letter: 

Background: 

Providers Structure Managed Accounts Differently, which Can Harm 
Participants: 

Managed Accounts Offer Advantages for Some Participants, But Fees and 
Lack of Standardized Reporting Requirements from DOL Can Offset These 
Advantages: 

Absent Guidance, Sponsors Face Challenges in Selecting and Overseeing 
Managed Account Providers: 

Conclusions: 

Recommendations for Executive Action: 

Agency Comments and Our Evaluation: 

Appendix I: Objectives, Scope, and Methodology: 

Appendix II: Methodology and Additional Results from Hypothetical 
Scenarios: 

Appendix III: Additional Performance Information from One Record 
Keeper's Report: 

Appendix IV: Comments from the Department of Labor: 

Appendix V: GAO Contact and Staff Acknowledgments: 

Tables: 

Table 1: Eight Providers' Strategies for Developing 401(k) Managed 
Account Participant Asset Allocations: 

Table 2: Effect on Provider Allocations Using Personalized Information 
for 30-and 57-year-old Hypothetical Participants: 

Table 3: Information in Retirement Readiness Statements Furnished to 
Participants in Three Managed Accounts that GAO Reviewed: 

Table 4: Example of Variation in 401(k) Plan Managed Account Fees: 

Table 5: Examples of Plan and Investment-Related Information Plan 
Sponsors Are Required to Disclose to Participants with 401(k) 
Investments: 

Table 6: Comparison of Factors Sponsors Said They Considered When 
Selecting a Managed Account Provider: 

Table 7: Characteristics of Sponsors Selected for GAO Interviews: 

Table 8: Basic Information for GAO Hypothetical Participant Scenarios 
Provided to Managed Account Providers: 

Table 9: Additional Personalized Information for GAO Hypothetical 
Participant Scenarios 1 and 3: 

Table 10: GAO Hypothetical Plan Information: 

Table 11: GAO Hypothetical Plan Investment Options: 

Figures: 

Figure 1: Number of Managed Account Providers Serving 401(k) Plans 
Since 1990: 

Figure 2: Key Differences among Balanced Funds, Target Date Funds, and 
Managed Accounts in 401(k) Plans: 

Figure 3: Example of How Managed Account Providers Make Investment 
Decisions For Participants: 

Figure 4: Entities that May Participate in a Managed Account Service 
Arrangement in 401(k) Plans: 

Figure 5: Selected Provider Allocations to Hypothetical Investment 
Options for a Hypothetical 30-year-old Participant: 

Figure 6: Example of a Direct Managed Account Arrangement in a 401(k) 
Plan: 

Figure 7: Example of a Subadvised Managed Account Arrangement in a 
401(k) Plan: 

Figure 8: Example of Annualized Rates of Return from One Record Keeper 
for Different Types of Professionally Managed 401(k) Portfolios, 2007-
2012, Net of Additional Fees: 

Figure 9: Example of Growth in a Participant's 401(k) Account Balance 
over Time Using Different Reported Managed Account Rates of Return, 
Net of Additional Fees: 

Figure 10: Variation in Additional Participant Fees Paid for a Managed 
Account Over a 20-Year Period Given Different Fee Rates: 

Figure 11: Example of Custom Benchmarks and Summary Statistics Used to 
Report Managed Account Performance to Participants: 

Figure 12: Example of Returns-Based Performance Information Provided 
to Sponsors by One Provider: 

Figure 13: Median Allocations for GAO Hypothetical Participant 
Scenarios Show a Downward Trend in Allocations to Equity as the 
Participant Ages: 

Figure 14: Provider Allocations to Hypothetical Investment Options for 
a Hypothetical 30-year-old Participant: 

Figure 15: Provider Allocations to Asset Classes for a Hypothetical 30-
year-old Participant: 

Figure 16: Provider Allocations to Hypothetical Investment Options for 
a Hypothetical 45-year-old Participant: 

Figure 17: Provider Allocations to Asset Classes for a Hypothetical 45-
year-old Participant: 

Figure 18: Provider Allocations to Hypothetical Investment Options for 
a Hypothetical 57-year-old Participant: 

Figure 19: Provider Allocations to Asset Classes for a Hypothetical 57-
year-old Participant: 

Figure 20: Examples of Annualized Rates of Return from One Record 
Keeper for Different Types of Professionally Managed and Self-directed 
401(k) Portfolios, 2007-2012, Net of Additional Fees: 

Figure 21: Average Annualized Rates of Return from One Record Keeper 
for Different Types of Professionally Managed and Self-directed 401(k) 
Portfolios, 2007-2012, Net of Additional Fees: 

Abbreviations: 

BLS: Bureau of Labor Statistics: 

DOL: U.S. Department of Labor: 

EBRI: Employee Benefit Research Institute: 

EBSA: Employee Benefits Security Administration: 

ERISA: Employee Retirement Income Security Act of 1974: 

IRA: Individual Retirement Account: 

MVO: Mean-Variance Optimization: 

PPA: Pension Protection Act of 2006: 

QDIA: Qualified Default Investment Alternative: 

RIA: Registered Investment Adviser: 

SEC: U.S. Securities and Exchange Commission: 

[End of section] 

United States Government Accountability Office: 
GAO:
441 G St. N.W. 
Washington, DC 20548: 

June 25, 2014: 

The Honorable George Miller: 
Ranking Member: 
Committee on Education and the Workforce: 
House of Representatives: 

Many 401(k) plan participants lack the knowledge, interest, or time to 
manage their retirement accounts.[Footnote 1] In response, plan 
sponsors have increasingly offered managed account services to their 
participants.[Footnote 2] In managed accounts, service providers make 
investment and portfolio decisions for participants in employer-
sponsored 401(k) plans.[Footnote 3] Managed accounts typically provide 
customized investment management of participants' 401(k) accounts as 
they accumulate, and sometimes as they spend down, their retirement 
savings. Similar investment arrangements have been offered to retail 
investors since the 1970s, but managed accounts have gained popularity 
in 401(k) plans in part due to regulations issued by the Department of 
Labor (DOL) in 2007 providing that certain managed accounts could be 
used as qualified default investment alternatives in 401(k) plans. We 
estimate that the total amount of defined contribution plan assets in 
managed accounts exceeded $100 billion at the end of 2012.[Footnote 4] 
Demand for managed accounts may continue to grow, as these services 
may be attractive to the many 401(k) plan participants who may lack 
the knowledge or initiative to make prudent choices about how much to 
contribute and how to direct their assets among investment options in 
their plan. However, the increasing trend to offer managed accounts in 
401(k) plans has raised some concerns about whether such services are 
advantageous for participants in terms of service and cost and whether 
sponsors understand their role in overseeing the use of managed 
accounts. In light of these concerns, you asked us to examine managed 
accounts in 401(k) plans. 

In conducting this work, we answered the following questions: 

1. How do service providers structure managed accounts? 

2. What are the advantages and disadvantages of managed accounts for 
401(k) plan participants? 

3. What challenges, if any, do plan sponsors face in selecting and 
overseeing managed account providers? 

To answer these questions, we reviewed relevant research and federal 
laws, regulations, and guidance on managed accounts in 401(k) plans. 
[Footnote 5] To examine the key issues related to managed accounts in 
401(k) plans and gather data about their prevalence and performance, 
we conducted in-depth case studies of eight selected managed account 
providers that, according to our estimates, represented over 95 
percent of the managed account industry in defined contribution plans, 
as measured by assets under management in 2013. We selected providers 
based on their size, location, and legal and fee structures. We also 
interviewed industry representatives--including academics, industry 
research firms, and participant advocacy groups--and government 
officials, including officials from DOL's Employee Benefits Security 
Administration (EBSA). To gain additional information on the structure 
of managed accounts in 401(k) plans and the role of service providers, 
we reviewed Securities and Exchange Commission (SEC) filings[Footnote 
6] for the eight managed account providers in our case studies and 22 
other providers we identified during the course of our work. As part 
of our case studies, we reviewed available documentation on the 
structure of managed accounts. To further understand the different 
methodologies and structures of managed accounts, we developed and 
submitted participant scenarios to the eight providers and asked them 
to provide hypothetical asset allocations for those participants, 
which seven of them completed and returned to us. To identify the 
advantages and disadvantages of managed accounts for 401(k) plan 
participants and any challenges sponsors face in selecting and 
overseeing managed account providers, we reviewed relevant 
documentation such as quarterly managed account reports to plan 
sponsors and conducted semi-structured interviews with 12 plan 
sponsors. To identify sponsors for interviews, we conducted a non-
generalizable survey facilitated through PLANSPONSOR.[Footnote 7] 
Based on their responses to the survey, we selected sponsors with a 
variety of characteristics, such as plan size and managed account 
provider. Further, we used publicly available data to develop 
illustrations of how various factors may affect the outcomes of 
participants in managed accounts. To assess the reliability of these 
data, we considered the reliability and familiarity of the source of 
the data or information and, when necessary, interviewed 
representatives of those sources about their methods, internal 
controls, and results. We found these data sufficiently reliable for 
our purposes. For more information on the data and other methodologies 
we used see appendix I. 

We conducted this performance audit from October 2012 to June 2014 in 
accordance with generally accepted government auditing standards. 
Those standards require that we plan and perform the audit to obtain 
sufficient, appropriate evidence to provide a reasonable basis for our 
findings and conclusions based on our audit objectives. We believe 
that the evidence obtained provides a reasonable basis for our 
findings and conclusions based on our audit objectives. 

Background: 

Side bar: 

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. 

Source: GAO analysis of provider information. GAO-14-310. 

[End of side bar] 

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.[Footnote 8] Investment options generally 
include mutual funds, stable value funds,[Footnote 9] 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. 

Figure 1: Number of Managed Account Providers Serving 401(k) Plans 
Since 1990: 

[Refer to PDF for image: vertical bar graph] 

Number of providers offering managed account services for each year: 

1990: 1; 
1991: 1; 
1992: 1; 
1993: 1; 
1994: 1; 
1995: 1; 
1996: 1; 
1997: 1; 
1998: 2; 
1999: 3; 
2000: 3; 
2001: 3; 
2002: 4; 
2003: 6; 
2004: 8; 
2005: 8; 
2006: 11; 
2007: 11; 
2008: 12; 
2009: 12; 
2010: 13; 
2011: 13; 
2012: 15. 

Source: GAO analysis of information from managed account providers. 
GAO-14-310. 

Note: This figure represents only those providers that developed the 
underlying discretionary management method for managing participants' 
accounts. Plan record keepers--providers that maintain records of 
participant contributions and returns--have a role in offering managed 
accounts to participants, but generally rely on managed account 
providers to develop asset allocation strategies for participant 
accounts. Some of these managed account providers offer their services 
through multiple record keepers and may be sub-contractors to record 
keepers. In the latter situation, the record keeper may brand the 
managed account as their own, but decisions about how to allocate 
participant retirement savings come from the managed account provider. 
For example, one of the managed account providers listed in this 
figure provides its discretionary managed account services through 18 
record keepers. Thus, participants in plans that use one of those 18 
record keepers may all receive the same underlying discretionary 
management, but their record keeper may brand the managed account 
differently. 

[End of figure] 

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.[Footnote 10] 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,[Footnote 11] 
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. 

Figure 2: Key Differences among Balanced Funds, Target Date Funds, and 
Managed Accounts in 401(k) Plans: 

[Refer to PDF for image: illustration] 

Professionally managed allocations: 

Investment products: 

Balanced funds: 
Mix of assets: Fixed mix over time; 
Adjust mix based on: N/A; Plans A, B, and C. 

Target date funds: Basic: 
Mix of assets: Mix adjusts over time; 
Adjust mix based on: Retirement date/age; Plans A, B, and C. 

Target date funds: Custom[A]: 
Mix of assets: Mix adjusts over time; 
Adjust mix based on: Retirement date/age and plan demographics; Plans 
A, B, and C. 

Investment service: 

Managed accounts: Customized[B]: 
Mix of assets: Mix adjusts over time; 
Adjust mix based on: Individual characteristics. 

Managed accounts: Customized + Personalization[C]: 
Mix of assets: Mix adjusts over time; 
Adjust mix based on: Individual characteristics and additional personal
information. 

Source: GAO analysis of DOL publications, industry publications, and 
information from plan sponsors, record keepers, and managed account 
providers. GAO-14-310. 

[A] Some plan sponsors have established custom target date funds 
instead of relying on preexisting target date funds offered by 
investment management firms. Custom target date funds can be more 
precisely tailored to match a plan's objectives and demographics, and 
offer a plan sponsor greater control over the underlying investments 
of a target date fund. However, custom target date funds may involve 
costs greater than those of an already-existing fund, so they may be 
more popular among larger plan sponsors. 

[B] In customized managed account services, the provider allocates a 
participant's account based solely on the participant's age or based 
on additional factors that can be easily obtained from the plan's 
record keeper, such as gender, income, current account balance, and 
current savings rate. 

[C] Personalization by managed account providers includes not only a 
review of age and recordkeeping data, but the provider also allows 
participants to provide personalized information such as stating their 
preferences for risk or the availability of spousal assets to inform 
the asset allocation process. 

[End of figure] 

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. 

Figure 3: Example of How Managed Account Providers Make Investment 
Decisions For Participants: 

[Refer to PDF for image: illustration] 

Scenario A – No managed account service: 
Participant selects investment options[A]; 
Examples of 401(k) Plan Investment Options: 
Stock fund; 
Bond fund; 
Target date fund; 
Stable value fund. 

Scenario B – With managed account service: 
Participant enrolls in, or is defaulted into, managed account service; 
Participant pays a fee; 
Managed account provider selects investment options; 
Examples of 401(k) Plan Investment Options: 
Stock fund; 
Bond fund; 
Target date fund; 
Stable value fund. 

Source: GAO analysis of DOL publications, industry publications, and 
information from plan sponsors, record keepers, and managed account 
providers. GAO-14-310. 

[A] When sponsors do not offer managed account services, they may 
decide to default participants into an investment option such as a 
target date fund. 

[End of figure] 

DOL Oversight: 

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,[Footnote 
12] 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. 

Managed Accounts as Qualified Default Investment Alternatives and Opt-
in Services: 

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.[Footnote 13] 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).[Footnote 14] 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.[Footnote 15] However, plan fiduciaries remain responsible 
for the prudent selection and monitoring of any QDIA offered by the 
plan.[Footnote 16] 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.[Footnote 17] 
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.[Footnote 18] 

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. 

Disclosure Regulations: 

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.[Footnote 19] 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.[Footnote 20] 

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.[Footnote 21] 

Roles and Fiduciary Obligations Under ERISA: 

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. 

Figure 4: Entities that May Participate in a Managed Account Service 
Arrangement in 401(k) Plans: 

[Refer to PDF for image: illustration] 

Entity: Plan Sponsor; 
Key roles: 
* Decides to offer managed accounts, selects a managed account 
provider, and, if applicable, negotiates the service agreement with 
the provider; 
* Monitors the managed account. 

Entity: Plan Record keeper; 
Key roles: 
* Maintains a recordkeeping system that is used to track contributions 
and returns; 
* May provide the managed account provider with basic information on 
the participant, such as the participant's account balance, that the 
managed account provider uses to inform the development of a strategy 
for investing participant accounts; 
* Changes participant investments in accordance with the investment 
strategy developed by the managed account provider. 

Entity: Managed Account Provider; 
Key roles: 
* Generally, develops an asset allocation strategy and selects 
investment options for investing participant accountsbased on 
information provided by the record keeper and, if applicable, any 
other personalized information provided by the participant. 

Source: GAO analysis of DOL publications, industry publications, and 
information from plan sponsors, record keepers, and managedaccount 
providers. GAO-14-310. 

[End of figure] 

Some record keepers and intermediary[Footnote 22] 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.[Footnote 23] 
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.[Footnote 24] 

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.[Footnote 
25] 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.[Footnote 26] A 3(38) Investment Manager fiduciary 
can only be a bank, an insurance company, or a Registered Investment 
Adviser (RIA). Under ERISA, 3(38) Investment Manager fiduciaries have 
the power to manage, acquire, or dispose of plan assets, and they 
acknowledge, in writing, that they are a fiduciary with respect to the 
plan. In contrast, a 3(21) Investment Adviser fiduciary usually does 
not have authority to manage, acquire, or dispose of plan assets, but 
is still a fiduciary because its investment recommendations may 
exercise some level of influence and control over the investments made 
by the plan. When managed account services are offered as QDIAs, the 
managed account provider is generally required to be a 3(38) 
Investment Manager fiduciary. There is no similar explicit requirement 
for managed account providers whose services are offered within a plan 
on an opt-in basis.[Footnote 27] 

Providers Structure Managed Accounts Differently, which Can Harm 
Participants: 

Managed Account Providers Vary Their Services: 

Managed account providers vary how they provide services, even though 
they generally offer the same basic service--initial and ongoing 
investment management of a 401(k) plan participant's account based on 
generally accepted industry methods. The eight providers in our case 
studies use different investment options, employ varying strategies to 
develop and adjust asset allocations for participants, incorporate 
varying types and amounts of participant information, and rebalance 
participant accounts at different intervals.[Footnote 28] As a result, 
participants with similar characteristics in different plans may have 
differing experiences. 

Investment Options: 

To develop participant asset allocations, most of the eight providers 
in our case studies use the investment options chosen by the plan 
sponsor.[Footnote 29] By contrast, other providers require plan 
sponsors that want to offer their managed account to accept a 
preselected list of investment options from which the provider will 
determine participant asset allocations, including exchange traded 
funds[Footnote 30] or asset classes not typically found in 401(k) plan 
lineups, such as commodities. Because they are atypical investment 
options, participants who do not sign up for managed accounts may not 
be able to access them. Compared to typical 401(k) plan investment 
options, these atypical investment options may provide broader 
exposure to certain markets and opportunities to diversify participant 
retirement assets. 

Asset Allocation Strategies: 

The eight managed account providers in our case studies generally 
reported making asset allocation decisions based on modern portfolio 
theory, which sets a goal of taking enough risk so that participants' 
401(k) account balances may earn large enough returns over time to 
meet their retirement savings goals, but not so much that their 
balances could earn lower or even negative returns.[Footnote 31] 
Managed account providers generally help participants by constructing 
portfolios that attempt to provide maximum expected returns with a 
given level of risk, but their strategies can range from formal to 
informal. The formal way of determining this type of portfolio is 
called mean-variance optimization (MVO), under which providers plot 
risk and return characteristics of all combinations of investment 
options in the plan and choose the portfolio that maximizes expected 
return for a given level of risk.[Footnote 32] There are a number of 
specific techniques that managed account providers can apply to 
improve the quality and sophistication of asset allocations, including 
Monte Carlo simulation.[Footnote 33] However, some providers 
incorporated less formal ways of achieving a diversified portfolio, 
such as active management and experience-based methods.[Footnote 34] 
The eight providers in our case studies use varying strategies and 
participant goals to develop and adjust asset allocations for 
participants, as shown in table 1. As a result, participants with 
similar characteristics may end up with different asset allocations. 

Table 1: Eight Providers' Strategies for Developing 401(k) Managed 
Account Participant Asset Allocations: 

Provider: A; 
Strategies: Mean-variance optimization (MVO),[B] Monte Carlo,[C] and 
experience-based[D]; 
Participant goal (percent of participant's final ending 
compensation)[A]: 100 percent; 
Description: According to this provider, it has 19 options for the 
equity percentage of the participant's account, and 31 options for 
years to retirement. This provider builds an efficient frontier for 
asset classes, but also considers lifecycle theory, evaluating 
changing participant risk tolerances over time and tradeoffs between a 
participant's financial and human capital. 

Provider: B; 
Strategies: MVO; 
Participant goal (percent of participant's final ending 
compensation)[A]: 85 percent; 
Description: According to this provider, it constructs 101 portfolios 
per plan--one for each equity/fixed income combination. If a 
participant is defaulted into the managed account or does not provide 
personalized information, this provider will determine the 
participant's asset allocation solely on their investment time 
horizon. If the participant provides personalized information, this 
provider will assess their personal financial situation to determine 
an appropriate asset allocation. Based on this asset allocation, this 
provider places the participant into the appropriate portfolio. 

Provider: C; 
Strategies: MVO, Monte Carlo, and experience-based; 
Participant goal (percent of participant's final ending 
compensation)[A]: 80 percent or higher; 
Description: According to this provider, it creates 10 asset 
allocation model portfolios using the investment options in the plan 
and places participants in 1 of the 10 model portfolios based on their 
risk profile. It uses a glide path approach to reduce risk in each 
portfolio over time.[E] This provider noted that it believes its glide 
path approach is more conservative than many target date fund glide 
paths. 

Provider: D; 
Strategies: MVO, Monte Carlo, and experience-based; 
Participant goal (percent of participant's final ending 
compensation)[A]: 80 percent; 
Description: This provider said it tends to be more conservative, 
investing participants' 401(k) account balances more heavily in fixed 
income assets and setting parameters for international and emerging 
market assets, to increase the probability that participants will 
achieve their retirement savings goals. 

Provider: E; 
Strategies: MVO and experience-based; 
Participant goal (percent of participant's final ending 
compensation)[A]: 70 percent; 
Description: According to this provider, it allocates participant 
accounts to 1 of 50 steps on one of three glide paths based on the 
participant's age and ratio of retirement assets to liabilities. This 
provider uses actuarial calculations to determine participant funded 
ratios--dividing the total amount of money the participant is expected 
to have saved at retirement by the total amount of money the 
participant needs to have saved in order to fund lifetime retirement 
income. 

Provider: F; 
Strategies: MVO, Monte Carlo, and experience-based; 
Participant goal (percent of participant's final ending 
compensation)[A]: 70 percent; 
Description: According to this provider, it creates individualized 
strategies for each participant, which this provider noted results in 
unique portfolios for approximately 80 percent of its participant 
population. Unlike other providers, it does not set asset allocation 
targets prior to selecting investment options. 

Provider: G; 
Strategies: Active management[F]; 
Participant goal (percent of participant's final ending 
compensation)[A]: No goal specified; 
Description: This provider said it develops a set of five portfolios 
using exchange traded funds.[G] Each portfolio has a dedicated 
flexible portion for which the provider will be able to adjust between 
equity assets and cash based on market conditions. This provider 
places participants in one of the portfolios based on their age. 

Provider: H; 
Strategies: Experience-based; 
Participant goal (percent of participant's final ending 
compensation)[A]: No goal specified; 
Description: This provider said it generally relies on a time horizon 
based formula to determine optimal asset allocations for participants. 
This provider's default formula is to subtract the participant's age 
from 100 and allocate that percent of the participant's account to an 
equity pool of assets, with the remainder allocated to a fixed income 
pool.[H] This provider includes in the fixed income pool estimates of 
the total value a participant could expect to receive from defined 
benefit plans and Social Security retirement benefits. 

Source: GAO analysis of information provided by managed account 
providers. GAO-14-310. 

[A] Managed account providers have different philosophies about how 
much a participant should expect to spend during retirement, generally 
communicated as a percentage of the participant's expected final 
ending compensation. The goal they determine for participants may be 
an integral part of the provider's strategy for determining the 
participant's appropriate asset allocation. Providers that calculate 
this goal may provide participants status updates on their progress 
towards achieving this goal. 

[B] MVO is the formal way of constructing portfolios that balance risk 
and return. It entails plotting risk and return characteristics of all 
combinations of investment options in the plan and choosing the 
portfolio that maximizes expected return for a given level of risk. 

[C] Monte Carlo simulation describes the range of outcomes from a 
given asset allocation assuming various inputs for expected returns, 
volatilities, and correlations of investment options in the plan. 

[D] Experience-based methods for developing asset allocations rely on 
tradition, experience, or rules of thumb and may be less expensive to 
implement than MVO strategies. Popular experience-based methods could 
include allocation to fixed income assets increase with participants' 
risk aversion or allocation to equity assets remain at one hundred 
minus the participant's age. 

[E] A glide path approach generally adjusts participant risk levels 
downward over time. 

[F] Active management strategies seek to achieve specific goals and 
require more hands-on management of the fund by the investment manager 
than passively managed funds. This provider uses a rules-based 
approach, but also considers market trends in actively managing the 
flexible portion of their asset allocation. 

[G] Exchange traded funds are similar to mutual funds in that they 
offer investors a way to pool their money in a fund that makes 
investments in stocks, bonds, or other assets and, in return, to 
receive an interest in an investment pool. However, shares of the 
exchange traded funds are traded on a national stock exchange and at 
market prices that may or may not be the same as the net asset value 
of the shares. Unlike traditional mutual funds, exchange traded funds 
do not sell individual shares directly to investors, and investors may 
not redeem individual shares; the funds only issue and redeem their 
shares in large blocks known as creation units. 

[H] While one hundred minus age is this provider's default method for 
determining asset allocation to equities, the provider noted that plan 
sponsors may specify other methods of determining the appropriate 
asset allocation to equity assets. 

[End of table] 

Providers' use of different asset allocation strategies leads to 
variation in the asset allocations participants actually experience. 
As shown in figure 5, four of the eight providers in our case studies 
vary in their recommendations of specific investment options for a 30-
year old participant.[Footnote 35] 

Figure 5: Selected Provider Allocations to Hypothetical Investment 
Options for a Hypothetical 30-year-old Participant: 

[Refer to PDF for image: vertical bar graph] 

Provider allocations to hypothetical investment options: 

Each bar represents an allocation by a provider to one of the 
hypothetical investment options listed below. 

Large blend, index: 
Provider 1: 22%; 
Provider 2: 18%; 
Provider 3: 7.5%; 
Provider 4: 30%. 

Foreign large blend: 
Provider 1: 31%; 
Provider 2: 15%; 
Provider 3: 9.2%; 
Provider 4: 10%. 

Intermediate-term bond: 
Provider 1: 12%; 
Provider 2: 3%; 
Provider 3: 0%; 
Provider 4: 10%. 

Large blend, index: 
Provider 1: 35%; 
Provider 2: 0%; 
Provider 3: 13.6%; 
Provider 4: 0%. 

World stock, large growth: 
Provider 1: 0%; 
Provider 2: 22%; 
Provider 3: 16.8%; 
Provider 4: 0%. 

Large blend: 
Provider 1: 0%; 
Provider 2: 8%; 
Provider 3: 19.1%; 
Provider 4: 0%. 

Intermediate-term bond: 
Provider 1: 0%; 
Provider 2: 5%; 
Provider 3: 12%; 
Provider 4: 0%. 

Mid growth: 
Provider 1: 0%; 
Provider 2: 5%; 
Provider 3: 8.2%; 
Provider 4: 0%. 

Small growth: 
Provider 1: 0%; 
Provider 2: 0%; 
Provider 3: 2.5%; 
Provider 4: 10%. 

Mid value: 
Provider 1: 0%; 
Provider 2: 5%; 
Provider 3: 7.3%; 
Provider 4: 0%. 

Large growth: 
Provider 1: 0%; 
Provider 2: 3%; 
Provider 3: 3.7%; 
Provider 4: 0%. 

Money market fund: 
Provider 1: 0%; 
Provider 2: 0%; 
Provider 3: 0%; 
Provider 4: 40%. 

World allocation, large blend: 
Provider 1: 0%; 
Provider 2: 14%; 
Provider 3: 0%; 
Provider 4: 0%. 

Inflation-protected bond: 
Provider 1: 0%; 
Provider 2: 2%; 
Provider 3: 0%; 
Provider 4: 0%. 

Source: GAO analysis of provider asset allocations. GAO-14-310. 

Note: This figure presents illustrative allocations from four case 
study providers for our hypothetical 30-year-old participant. 
Investment option categories presented here are based on publicly 
reported Morningstar Fund information in January 2014 for the 14 
mutual funds that we selected for hypothetical plan investment options 
based on available information about whether these funds could be 
found in 401(k) plans. 

[End of figure] 

Type and Amount of Participant Information: 

The type and amount of information providers use can also affect the 
way participant account balances are allocated. For example, two of 
the eight providers in our case studies only offer a customized 
service--allocating a participant's account based solely on age or 
other factors that can be easily obtained from the plan's record 
keeper, such as gender, income, current account balance, and current 
savings rate. The other six providers also offer a personalized 
service that takes into account additional personal information to 
inform asset allocations, such as risk tolerance or spousal assets. 
Providers that offer a personalized service reported that 
personalization could lead to better asset allocation for 
participants, but they also reported that generally fewer than one-
third, and sometimes fewer than 15 percent, of participants furnish 
this personalized information. As a result, some industry 
representatives felt that participants may not be getting the full 
value of the service for which they are paying. For example, 
participants who are defaulted into managed accounts that offer a 
highly personalized service run the risk of paying for services they 
are not using if they are disengaged from their retirement 
investments. As shown in table 2, we found that among five of the 
seven providers that furnished asset allocations for our hypothetical 
scenarios, there was little relationship between the level of 
personalization and the fee they charged to participants for the 
managed account service.[Footnote 36] 

Table 2: Effect on Provider Allocations Using Personalized Information 
for 30-and 57-year-old Hypothetical Participants: 

Provider: A; 
Effect of adding participants' personalized information on the asset 
allocation of a hypothetical 30-year-old participant[A]: Change; 
Effect of adding participants' personalized information on the asset 
allocation of a hypothetical 57-year-old participant[A]: Change; 
Comparative size of additional managed account fee charged to 
participants (range from 0.08 to 1 percent)[B]: Middle. 

Provider: B; 
Effect of adding participants' personalized information on the asset 
allocation of a hypothetical 30-year-old participant[A]: Change; 
Effect of adding participants' personalized information on the asset 
allocation of a hypothetical 57-year-old participant[A]: Change; 
Comparative size of additional managed account fee charged to 
participants (range from 0.08 to 1 percent)[B]: Higher. 

Provider: C; 
Effect of adding participants' personalized information on the asset 
allocation of a hypothetical 30-year-old participant[A]: No change; 
Effect of adding participants' personalized information on the asset 
allocation of a hypothetical 57-year-old participant[A]: Change; 
Comparative size of additional managed account fee charged to 
participants (range from 0.08 to 1 percent)[B]: Lower. 

Provider: D; 
Effect of adding participants' personalized information on the asset 
allocation of a hypothetical 30-year-old participant[A]: No change; 
Effect of adding participants' personalized information on the asset 
allocation of a hypothetical 57-year-old participant[A]: Change; 
Comparative size of additional managed account fee charged to 
participants (range from 0.08 to 1 percent)[B]: Lower to higher. 

Provider: E; 
Effect of adding participants' personalized information on the asset 
allocation of a hypothetical 30-year-old participant[A]: Nearly the 
same[C]; 
Effect of adding participants' personalized information on the asset 
allocation of a hypothetical 57-year-old participant[A]: No change; 
Comparative size of additional managed account fee charged to 
participants (range from 0.08 to 1 percent)[B]: Lower. 

Provider: F; 
Effect of adding participants' personalized information on the asset 
allocation of a hypothetical 30-year-old participant[A]: No change; 
Effect of adding participants' personalized information on the asset 
allocation of a hypothetical 57-year-old participant[A]: No change; 
Comparative size of additional managed account fee charged to 
participants (range from 0.08 to 1 percent)[B]: Lowest to middle. 

Provider: G; 
Effect of adding participants' personalized information on the asset 
allocation of a hypothetical 30-year-old participant[A]: No change; 
Effect of adding participants' personalized information on the asset 
allocation of a hypothetical 57-year-old participant[A]: No change; 
Comparative size of additional managed account fee charged to 
participants (range from 0.08 to 1 percent)[B]: Middle. 

Source: GAO analysis of provider asset allocations. GAO-14-310. 

Note: Seven of the eight providers in our case studies submitted 
example asset allocations for five hypothetical participant scenarios 
in one hypothetical plan. Two of the five hypothetical participant 
scenarios pertain to a 30-year old participant and another two pertain 
to a hypothetical 57-year old participant. For each hypothetical 
participant, one scenario only included customized information--age or 
other factors that can be easily obtained from the plan's record 
keeper, such as gender, income, current account balance, and current 
savings rate--and the other scenario provided the same customized 
information but with additional, personal information, such as the 
hypothetical participant's preference for risk or their spouse's 
assets. 

[A] We compared the asset allocations sent by the seven providers for 
the 30-year old and 57-year old participants to determine how the 
additional, personal information affected their hypothetical asset 
allocations and report here whether the asset allocations for each 
provider changed, were nearly the same, or did not change. Providers A 
through E in this table told us that additional personal information 
affects their asset allocations, which was generally confirmed by the 
differences in their asset allocations. For example, provider A's mid-
range fee is less than could be expected given that personalization 
resulted in different asset allocations for both participants, while 
provider E's low fee is to be expected given that personalization 
generally did not result in different asset allocations for either 
participant. In contrast, providers F and G told us that they only 
offer a customized service, which was confirmed by the fact that their 
asset allocations did not change for each hypothetical participant. 

[B] Providers in our case studies told us the range of fees they 
typically charge participants who use their services--generally 
between 0.08 and 1 percent of the value of the assets providers manage 
for the participant. Here, we have included a comparative statement 
about the fee that participants could be charged if they enrolled in, 
or were defaulted into, managed accounts with one of these providers. 

[C] We categorized this provider's asset allocations as nearly the 
same because they differed by less than 5 percent. Comparatively, 
allocations classified as the No change were exactly the same, and 
allocations classified as Change differed by more than 10 percent and 
sometimes by over 300 percent. 

[End of table] 

Some managed account providers' services may become more beneficial as 
participants age or as their situations become more complex because 
personalization seeks to create a tailored asset allocation for each 
participant. Such an individualized approach could even mean that 
older participants who are close to retirement and very young 
participants just starting their careers could be placed in equally 
risky allocations based on their personalized circumstances. However, 
industry representatives told us that participants who never supply 
additional, personalized information to managed account providers may 
be allocated similarly over time to those participants in target date 
funds. 

Rebalancing Approaches and Time Frames: 

Providers differ in their approaches and time frames for rebalancing 
participant managed accounts--adjusting participant accounts to 
reflect any changes to their asset allocation strategies based on 
changing market conditions and participant information. Seven of the 
eight providers in our case studies use a glide path approach to 
systematically reduce participant risk over time but one does not set 
predetermined glide paths for participants. Similarly, two of the 
eight providers in our case studies rebalance participant accounts 
annually, while the other providers generally review and rebalance 
participant accounts at least quarterly. Despite these differences in 
approaches and timeframes, our analysis of provider hypothetical asset 
allocations indicated that providers generally allocated less to 
equity assets and more to fixed income or cash-like assets for the 
older hypothetical participants than for the younger hypothetical 
participant.[Footnote 37] 

Providers Vary Their Fiduciary Roles and Some May Offer Less Liability 
Protection for Sponsors: 

Some managed account providers in our case studies offer their 
services under direct arrangements in which the plan sponsor directly 
contracts with a provider to offer these services, as shown in figure 
6.[Footnote 38] According to the providers we spoke with, managed 
account providers in this type of arrangement are generally 
fiduciaries, but record keepers may not be fiduciaries with respect to 
the managed account service, as their role consists primarily of 
providing information to the managed account provider and implementing 
asset allocation changes to participant accounts.[Footnote 39] 

Figure 6: Example of a Direct Managed Account Arrangement in a 401(k) 
Plan: 

[Refer to PDF for image: illustration] 

Direct service: 

Plan sponsor: May contract with: 
Managed account provider (fiduciary); Who manages: 
Plan participant account. 

Source: GAO analysis of managed account provider case studies. GAO-14-
310. 

Note: Plan sponsors are typically the named fiduciaries of the plan. 
In addition, all eight managed account providers included in our case 
studies told us they take on some level of fiduciary responsibility 
for the managed account, regardless of whether their services are 
offered as a Qualified Default Investment Alternative or on an opt-in 
basis. 

[End of figure] 

By contrast, some managed account providers use subadvised 
arrangements to offer their services. According to the providers we 
spoke to, in these arrangements, the plan sponsor does not directly 
contract with the managed account provider, and the plan's record 
keeper, or an affiliate, may take on some fiduciary responsibility 
with respect to the managed account, as shown in figure 7. The record 
keeper may fulfill some of the responsibilities the managed account 
provider would have in a direct arrangement. These responsibilities 
may include providing periodic rebalancing based on the provider's 
strategy, marketing managed account services, or offering other 
ongoing support for participants.[Footnote 40] 

Figure 7: Example of a Subadvised Managed Account Arrangement in a 
401(k) Plan: 

[Refer to PDF for image: illustration] 

Subadvised service: 

Plan sponsor: May contract with: 
Recordkeeper[A]: 
Who manages: Plan participant account; and; 
Who contracts with: Managed account provider[B] (fiduciary). 

Source: GAO analysis of managed account provider case studies. GAO-14-
310. 

Note: Plan sponsors are typically the named fiduciaries of the plan. 
In addition, all eight managed account providers included in our case 
studies told us they take on some level of fiduciary responsibility 
for the managed account, regardless of whether their services are 
offered as a Qualified Default Investment Alternative or on an opt-in 
basis. Subadvised arrangements can be offered in multiple ways. For 
example, providers can charge level fees or could follow the structure 
laid out in the Department of Labor's SunAmerica Advisory Opinion 2001-
09A (December 2001). 

[A] Record keepers or their affiliates may also take on fiduciary 
roles, depending on the services they provide. 

[B] When a record keeper contracts with an intermediary provider that 
offers the use of multiple managed account providers, the intermediary 
would take the place of the managed account provider in this graphic 
and the multiple managed account providers that contract with the 
intermediary would be below the intermediary. 

[End of figure] 

All of the eight managed account providers in our case studies told us 
that they take on some level of fiduciary responsibility--regardless 
of whether their services are offered as QDIAs or on an opt-in basis--
so they each offer some protections to sponsors and participants in 
managed accounts. Seven of the providers in our case studies told us 
that they willingly accept 3(38) Investment Manager fiduciary status 
for discretionary management over participant accounts,[Footnote 41] 
but one of the eight providers in our case studies noted that it never 
accepts 3(38) Investment Manager fiduciary status because it only has 
discretion over participants' accounts once a year.[Footnote 42] This 
provider told us that it is only a 3(21) Investment Adviser fiduciary 
even though its managed account service is similar to that of the 
other providers in our case studies.[Footnote 43] Under ERISA, 3(21) 
Investment Adviser fiduciaries usually do not have authority over plan 
assets, but they may influence the operation of the plan by providing 
advice to sponsors and participants for a fee.[Footnote 44] As such, 
they are generally liable for the consequences when their advice is 
imprudent or disloyal. In contrast, a 3(38) Investment Manager 
fiduciary has authority to manage plan assets at their discretion and 
with prudent judgment, and is also liable for the consequences of 
imprudent or disloyal decisions. Because 3(38) Investment Manager 
fiduciaries have explicit discretionary authority and must have the 
qualifications of a bank, insurance company, or RIA,[Footnote 45] 
sponsors who use 3(38) Investment Manager fiduciaries may receive a 
broader level of liability protection from those providers as opposed 
to providers who offer managed account services as 3(21) Investment 
Adviser fiduciaries.[Footnote 46] In addition, when a 3(38) Investment 
Manager fiduciary is used, participants may have a broader level of 
assurance that they are receiving services from a qualified manager in 
light of the requirements related to qualifications of such 
fiduciaries. 

As noted previously, when managed account services are offered as 
QDIAs, DOL requires the managed account provider to generally be a 
3(38) Investment Manager fiduciary, but DOL has no similar explicit 
requirement for managed account providers whose services are offered 
on an opt-in basis.[Footnote 47] Absent explicit requirements or 
additional guidance from DOL, some managed account providers may 
choose to structure the services they provide to limit their fiduciary 
liability, which could ultimately provide less liability protection 
for sponsors for the consequences of provider investment management 
choices. Given the current lack of direction or guidance about 
appropriate fiduciary roles for providers that offer managed accounts 
on an opt-in basis, sponsors may not be aware of this potential 
concern. Industry representatives we spoke with expressed concern 
about managed account providers who do not accept full responsibility 
with respect to managed account services by acknowledging their role 
as a 3(38) Investment Manager fiduciary. Other representatives also 
noted that it was important for sponsors to understand providers' 
fiduciary responsibilities given the important differences between 
3(21) Investment Adviser and 3(38) Investment Manager fiduciaries with 
respect to the nature of liability protection they may provide for 
sponsors and the services they may provide for both sponsors and 
participants. 

Some Providers Offer Additional Services That Could Lead to Conflicts 
of Interest, which DOL Has Not Addressed: 

Managed account providers may offer potentially valuable additional 
services to participants in or near retirement regarding how to spend 
down their accumulated retirement savings, but these services could 
lead to potential conflicts of interest. Most of the providers in our 
case studies allow participants to continue receiving account 
management services when they retire as long as they leave all or a 
portion of their retirement savings in the 401(k) plan. Some of those 
providers also provide potentially useful additional services to 
participants in or near retirement and do not typically charge 
additional fees for doing so.[Footnote 48] These services may include 
helping participants review the tax consequences of withdrawals from 
their 401(k) account and advising them about when and how to claim 
Social Security retirement benefits. However, these providers may have 
a financial disincentive to recommend an out-of-plan option, such as 
an annuity or rollover to other plans or IRAs, because it is 
advantageous for them to have participants' continued enrollment in 
their managed account service offered through a 401(k) plan. 

Providers have developed ways to mitigate some of this potential 
conflict of interest by, for example, offering advice on alternate 
sources of income in retirement such as TIPS.[Footnote 49] Regardless, 
representatives from a participant advocacy group noted that managed 
account providers should have little involvement in a participant's 
decision about whether to stay in the managed account. As part of its 
responsibilities to protect plan participants under ERISA, DOL has not 
specifically addressed whether conflicts of interest may exist with 
respect to managed accounts offering additional services to 
participants in or near retirement.[Footnote 50] As a result, 
participants can be easily persuaded to stay in the managed account 
given the additional services offered to them by managed account 
providers.[Footnote 51] Additionally, the ease that these services 
offer could discourage managed account participants from fully 
considering other options, which can ultimately put them at risk of 
making suboptimal spend-down decisions. 

Managed Accounts Offer Advantages for Some Participants, But Fees and 
Lack of Standardized Reporting Requirements from DOL Can Offset These 
Advantages: 

Various Industry Representatives Report that Managed Accounts Can 
Provide a Number of Advantages for Participants: 

Increase Diversification: 

Some managed account providers and plan sponsors have said that 
increased diversification of retirement portfolios is the main 
advantage of the managed account service for 401(k) plan participants. 
Increased diversification for participants enrolled in a managed 
account can result in better risk management and increased retirement 
income compared to those who self-direct their 401(k) investments. For 
example, one provider's study of managed account performance found 
that the portfolios of all managed account participants were believed 
to have been appropriately allocated, but that 43 percent of those who 
self-directed their 401(k) investments had equity allocations that 
were believed to be inappropriate for their age, and nearly half of 
these participants' portfolios were improperly diversified.[Footnote 
52] The advantages of a diversified portfolio include reducing a 
participant's risk of loss, reducing volatility within the 
participant's account, and generating long-term positive retirement 
outcomes.[Footnote 53] 

Another reported advantage of managed accounts is that they help to 
moderate volatility in 401(k) account performance, compared to 
accounts of those who self-direct their 401(k) investments. For 
example, in two recent reports on managed account performance, one 
record keeper concluded that the expanded use of professionally 
managed allocations, including managed accounts, is contributing to a 
reduction in extreme risk and return outcomes for participants, and is 
also gradually mitigating concerns about the quality of portfolio 
decision-making within defined contribution plans.[Footnote 54] 
Managed account providers in our eight case studies also claim that 
the increased personalization and more frequent rebalancing of managed 
accounts create an appropriately diversified portfolio that better 
meets a participant's retirement goals than target date funds or 
balanced funds. According to these providers, periodic rebalancing 
combats participant inertia, one of the main problems with a self-
directed 401(k) account, and the failure to update investment 
strategies when financial circumstances change over time.[Footnote 55] 

Encourage Larger Contributions: 

Several managed account providers told us that another advantage of 
managed accounts is the tendency for participants to save more for 
retirement compared to those who are not enrolled in the service. For 
example, in a study of managed accounts, a provider reported that 
participants in plans for which this provider offers the service 
contributed $2,070 more on average in 2012 than participants who self-
directed investments in their 401(k) accounts (1.9 percent of salary 
more in contributions on average than participants who self-direct 
401(k) investments).[Footnote 56] This provider noted that managed 
account participants are better at taking advantage of their plan's 
matching contribution than participants who self-direct their 401(k) 
investments. For example, they found that 69 percent of managed 
account participants contributed at least to the level of the maximum 
employer matching contribution, while only 62 percent of participants 
who self-directed investments contributed to this level. This provider 
said that communication with managed account participants can lead to 
increased savings rates when they are encouraged to increase savings 
rates by at least 2 percentage points and to save at least to the 
point where they receive the full employer match, if such a match 
exists.[Footnote 57] Another service provider told us that it offers 
an online calculator that managed account participants can use to 
understand their retirement readiness. The provider also said that 
participants who use the calculator can see how increased savings can 
lead to improved retirement outcomes and will often increase their 
savings rate into their managed account. 

Improve Access to Retirement Planning Information: 

Retirement readiness statements received by participants who are 
enrolled in a managed account are another reported advantage of the 
service. Participants generally receive retirement readiness 
statements that can help them assess whether they are on track to 
reach their retirement goals, and the statements generally contain 
information about their retirement investments, savings rate, asset 
allocations, and projected retirement income. These statements help 
participants understand the likelihood of reaching their retirement 
goals given their current investment strategy and whether they should 
consider increasing their savings rates or changing risk tolerances 
for their investments. In some cases, these statements may provide 
participants with their first look in one document at the overall 
progress they are making toward their retirement goals.[Footnote 58] 
As shown in table 3, our review of three providers' statements shows 
that they use different metrics on participant readiness statements to 
evaluate participants' retirement prospects. For example, each 
statement provided participants with information on their retirement 
goals and risk tolerance, and a projection of their future retirement 
income to demonstrate the value of the service. 

Table 3: Information in Retirement Readiness Statements Furnished to 
Participants in Three Managed Accounts that GAO Reviewed: 

Participant profile, retirement goals, and/or risk tolerance; 
Provider 1: [Check]; 
Provider 2: [Check]; 
Provider 3: [Empty]. 

Retirement readiness projection and expected monthly or annual 
retirement income[A]; 
Provider 1: [Check]; 
Provider 2: [Check]; 
Provider 3: [Check]. 

Current asset allocation; 
Provider 1: [Check]; 
Provider 2: [Empty]; 
Provider 3: [Empty]. 

Opening and closing account balance for the period; 
Provider 1: [Check]; 
Provider 2: [Check]; 
Provider 3: [Empty]. 

Participant assets and/or liabilities; 
Provider 1: [Check]; 
Provider 2: [Check]; 
Provider 3: [Empty]. 

Savings rate; 
Provider 1: [Check]; 
Provider 2: [Empty]; 
Provider 3: [Check]. 

Individual fund and aggregate account performance; 
Provider 1: [Check]; 
Provider 2: [Empty]; 
Provider 3: [Empty]. 

Fees; 
Provider 1: [Check]; 
Provider 2: [Empty]; 
Provider 3: [Empty]. 

Action plan to increase savings; 
Provider 1: [Check]; 
Provider 2: [Empty]; 
Provider 3: [Check]. 

Source: GAO analysis of managed account reports reviewed during 
provider cased studies. GAO-14-310. 

[A] Typically, a projected amount of monthly income in retirement from 
all sources, including the 401(k) plan, Social Security retirement 
benefits, and any defined benefit plans. 

[End of table] 

Similar advantages, however, can be achieved through other retirement 
investment vehicles outside of a managed account and without paying 
the additional managed account fee. For example, in one recent study, 
a record keeper that offers managed accounts through its platform 
showed that there are other ways to diversify using professionally 
managed allocations, such as target date funds, which can be less 
costly.[Footnote 59] Although managed account providers may encourage 
participants to save more and review their progress towards achieving 
a secure retirement, participants still have to pay attention to these 
features of the managed account for it to provide value. Even if 
401(k) plan participants are not in managed accounts, we found that in 
some instances they can still receive advice and education from a 
provider in the form of retirement readiness statements. 

Fees for Managed Accounts Can Be a Disadvantage for Participants: 

The additional fee a participant generally pays for a managed account 
was the primary disadvantage mentioned by many industry 
representatives, plan sponsors, and participant advocates. Because of 
these additional fees, 401(k) plan participants who do not receive 
higher investment returns from the managed account services risk 
losing money over time. Some managed account providers and record 
keepers have reported that managed account participants earn higher 
returns than participants who self-direct their 401(k) plan 
investments, which may help participants offset the additional fee 
charged. For example, one provider told us that participants enrolled 
in managed accounts saw about 1.82 percentage points better 
performance per year, net of fees, compared to participants without 
managed accounts. Given these higher returns, this provider projects 
that a 25-year-old enrolled in its managed account could potentially 
see up to 35 percent more income at retirement than a participant not 
enrolled in the service, according to this provider's 
calculations.[Footnote 60] Another provider reported that the 
portfolios of participants who were defaulted into managed accounts 
were projected to receive returns of nearly 1 percentage point more 
annually, net of fees, after the provider made allocation changes to 
the participants' portfolios. 

However, the higher rates of return projected by managed account 
providers may not always be achievable. For instance, we found limited 
data from one record keeper that published returns for managed account 
participants that were generally less than or equal to the returns of 
other professionally managed allocations (a single target date fund or 
balanced fund) as shown in figure 8.[Footnote 61] 

Figure 8: Example of Annualized Rates of Return from One Record Keeper 
for Different Types of Professionally Managed 401(k) Portfolios, 2007-
2012, Net of Additional Fees: 

[Refer to PDF for image: vertical bar graph] 

Performance percentile: 5th; 
Rate of return: 
Single target date fund: 1.7%; 
Single balanced fund: 2.3%; 
Managed account: 0.2%. 

Performance percentile: 25th; 
Rate of return: 
Single target date fund: 1.7%; 
Single balanced fund: 3.1%; 
Managed account: 1.2%. 

Performance percentile: Average; 
Rate of return: 
Single target date fund: 2.2%; 
Single balanced fund: 3.3%; 
Managed account: 1.9%. 

Performance percentile: 75th; 
Rate of return: 
Single target date fund: 2.3%; 
Single balanced fund: 3.5%; 
Managed account: 2.4%. 

Performance percentile: 95th; 
Rate of return: 
Single target date fund: 3.7%; 
Single balanced fund: 4.3%; 
Managed account: 3.6%. 

Source: GAO representation of Vanguard returns data. GAO-14-310. 

Note: Information in this record keeper's reports is from a limited 
dataset that can only describe the portfolio performance for this 
record keeper's defined contribution plan participants with these 
types of retirement portfolios over a finite period of time. These 
data are not representative of the portfolio performance of the 
universe of defined contribution plan participants or for other 
periods of time. See Vanguard, Professionally Managed Allocations and 
the Dispersion of Participant Portfolios (Valley Forge, PA: August 
2013) and Vanguard, Target Date Funds and the Dispersion of 
Participant Portfolios (Valley Forge, PA: November 2012). These 
studies examine the effect of professionally managed allocations on 
participant portfolio construction in defined contribution plans. 
Professionally managed allocations are participant accounts where 100 
percent of the balance is invested by a professional money manager. 
For these studies, a single target date fund is the most common type 
of professionally managed allocation, but the category also includes 
traditional balanced funds and a managed account advisory service. The 
5-year returns data include portfolio returns from the recession of 
2007-2008. For this reason, the traditional balanced fund had 
generally higher returns over this period because of their larger 
fixed income exposure. Return results would likely be different if 
data from 2007-2008 were not included in the analysis. 

[End of figure] 

We used these and other returns data published by this record keeper 
to illustrate the potential effect over 20 years of different rates of 
return on participant account balances.[Footnote 62] On the lower end, 
this record keeper reported that, over a recent 5-year period, 25 
percent of its participants earned annualized returns of -0.1 percent 
or less, not even making up the cost of the additional fee for the 
service. On the higher end, the record keeper reported that, over a 
slightly different 5-year period, 25 percent of its participants 
earned annualized returns of 2.4 percent or higher for the service. 
These actual returns illustrate the substantial degree to which 
returns can vary. If such a 2.5 percentage point difference (between 
these higher and lower reported managed account rates of return of 2.4 
percent and -0.1 percent, respectively) were to persist over 20 years, 
a participant earning the higher managed account rate of return could 
have nearly 26 percent more in their ending account balance at the end 
of 20 years than a participant earning the lower rate of return in 
their managed account.[Footnote 63] As shown in Figure 9, using these 
actual rates of return experienced by participants in managed 
accounts, such a variation in rates of return can substantially affect 
participant account balances over 20 years. 

Figure 9: Example of Growth in a Participant's 401(k) Account Balance 
over Time Using Different Reported Managed Account Rates of Return, 
Net of Additional Fees: 

[Refer to PDF for image: multiple line graph] 

Years: 0; 
Higher reported managed account return of 2.4 percent: $17,000; 
Lower reported managed account return of -0.1 percent: $17,000. 

Years: 1; 
Higher reported managed account return of 2.4 percent: $21,360; 
Lower reported managed account return of -0.1 percent: $20,859. 

Years: 2; 
Higher reported managed account return of 2.4 percent: $25,890; 
Lower reported managed account return of -0.1 percent: $24,782. 

Years: 3; 
Higher reported managed account return of 2.4 percent: $30,595; 
Lower reported managed account return of -0.1 percent: $28,770. 

Years: 4; 
Higher reported managed account return of 2.4 percent: $35,480; 
Lower reported managed account return of -0.1 percent: $32,825. 

Years: 5; 
Higher reported managed account return of 2.4 percent: $40,551; 
Lower reported managed account return of -0.1 percent: $36,947. 

Years: 6; 
Higher reported managed account return of 2.4 percent: $45,812; 
Lower reported managed account return of -0.1 percent: $41,137. 

Years: 7; 
Higher reported managed account return of 2.4 percent: $51,271; 
Lower reported managed account return of -0.1 percent: $45,397. 

Years: 8; 
Higher reported managed account return of 2.4 percent: $56,931; 
Lower reported managed account return of -0.1 percent: $49,728. 

Years: 9; 
Higher reported managed account return of 2.4 percent: $62,801; 
Lower reported managed account return of -0.1 percent: $54,132. 

Years: 10; 
Higher reported managed account return of 2.4 percent: $68,886; 
Lower reported managed account return of -0.1 percent: $58,609. 

Years: 11; 
Higher reported managed account return of 2.4 percent: $75,191; 
Lower reported managed account return of -0.1 percent: $63,161. 

Years: 12; 
Higher reported managed account return of 2.4 percent: $81,724; 
Lower reported managed account return of -0.1 percent: $67,789. 

Years: 13; 
Higher reported managed account return of 2.4 percent: $88,492; 
Lower reported managed account return of -0.1 percent: $72,494. 

Years: 14; 
Higher reported managed account return of 2.4 percent: $95,501; 
Lower reported managed account return of -0.1 percent: $77,278. 

Years: 15; 
Higher reported managed account return of 2.4 percent: $102,758; 
Lower reported managed account return of -0.1 percent: $82,143. 

Years: 16; 
Higher reported managed account return of 2.4 percent: $110,270; 
Lower reported managed account return of -0.1 percent: $87,089. 

Years: 17; 
Higher reported managed account return of 2.4 percent: $118,045; 
Lower reported managed account return of -0.1 percent: $92,118. 

Years: 18; 
Higher reported managed account return of 2.4 percent: $126,091; 
Lower reported managed account return of -0.1 percent: $97,232. 

Years: 19; 
Higher reported managed account return of 2.4 percent: $134,415; 
Lower reported managed account return of -0.1 percent: $102,431. 

Years: 20; 
Higher reported managed account return of 2.4 percent: $143,026; 
Lower reported managed account return of -0.1 percent: $107,718. 

Source: GAO analysis of information from providers and published data 
on managed account fees and returns. GAO-14-310. 

Note: We conducted this analysis assuming that the participant had a 
starting account balance of $17,000 (based on the Employee Benefit 
Research Institute's (EBRI's) estimated median 401(k) account balance 
at year-end 2011), a starting salary of $40,000 (based on the Bureau 
of Labor Statistics' seasonally adjusted median weekly earnings for 
the third quarter of 2013), an average annual salary increase of 1.75 
percent (based on the Bureau of Labor Statistics' salary increase 
estimate for the 12-month period ending September 2013), and a savings 
rate of 9.7 percent (based on EBRI's estimate of an average employee 
savings rate of 6.7 percent for 2012 and a 3 percent average employer 
match). We used Vanguard's published data on 5-year annualized returns 
for defined contribution plan participants with professionally managed 
allocations, including managed accounts and participant-constructed 
portfolios, which we refer to as self-directed 401(k) accounts. The -
0.1 percent return represents the 25th percentile in managed account 
returns performance for the period of 2006-2011. The 2.4 percent 
return represents the 75th percentile in managed account returns for 
the period of 2007-2012. The managed account rates of return in this 
analysis are net of additional fees charged to participants. The 5-
year returns data include portfolio returns from the recession of 2007-
2008. Return results would likely be different if data from 2007-2008 
were not included in the analysis. Information provided by Vanguard is 
from a limited dataset that can only describe the portfolio 
performance for Vanguard defined contribution plan participants with 
these types of retirement portfolios over a finite period of time. 
These data are not representative of the portfolio performance of the 
universe of defined contribution plan participants or for other 
periods of time. See Vanguard, Professionally Managed Allocations and 
the Dispersion of Participant Portfolios (Valley Forge, PA: August 
2013) and Vanguard, Target Date Funds and the Dispersion of 
Participant Portfolios (Valley Forge, PA: November 2012). 

[End of figure] 

Further, this record keeper's published data on managed account rates 
of return were net of fees--rates of return would be higher if 
participants did not pay the additional fee for the service. For 
example, using this record keeper's average fee rate in our analysis, 
[Footnote 64] we estimate that a hypothetical managed account 
participant who earned a higher rate of return of 2.4 percent will pay 
$8,400 more in additional fees over 20 years than a participant who 
self-directs investments in their 401(k) account and does not pay the 
additional fee.[Footnote 65] To illustrate the potential effect that 
fees could have on a hypothetical participant's account balance over 
20 years, we used a higher fee of 1 percent reported to us by one 
provider to estimate that a participant would pay $14,000 in 
additional fees compared to a participant who self-directs investments 
in their 401(k) account over the same period. However, based on the 
reported performance data we found, there is no guarantee that 
participants will earn a higher rate of return with a managed account 
compared to the returns for other professionally managed allocations 
or self-directed 401(k) accounts. The limited performance data we 
reviewed show that in most cases, managed accounts underperformed 
these other professionally managed allocations and self-directed 
401(k) accounts over a 5-year period. However, managed account 
participants with lower rates of return still pay substantial 
additional fees for the service. To further illustrate the effect of 
fees on account balances, a hypothetical participant who earns a lower 
managed account rate of return of -0.1 percent would pay $6,900 in 
additional fees using this record keeper's average fee over 20 years 
compared to a participant who self-directed investments in their 
401(k) account, and the additional fees would increase to $11,500 at 
the 1 percent fee level using the lower rate of return.[Footnote 66] 

The additional managed account fees, which are charged to participants 
over and above investment management and administrative fees,[Footnote 
67] can vary substantially, and as a result, some participants pay no 
fees, others pay a flat fee each year, and still others pay a 
comparatively large percentage of their account balance for generally 
similar services from managed account providers.[Footnote 68] In our 
case studies, we reviewed the additional fees charged to participants 
for the service. One managed account provider charges a flat rate and 
fees for the other seven providers ranged from 0.08 to 1 percent of 
the participant's account balance annually, or $8 to $100 on every 
$10,000 in a participant's account.[Footnote 69] Therefore, 
participants with similar balances but different providers can pay 
different fees. As shown in table 4, participants with an account 
balance of $10,000 whose provider charges the highest fee may pay 12.5 
times as much as participants whose provider charges the lowest fee 
($100 and $8, respectively). However, participants with an account 
balance of $500,000 may pay up to 250 times as much as other 
participants but one is subject to a provider who charges the highest 
fees while the other is at the lowest fee provider ($5,000 and $20, 
respectively). 

Table 4: Example of Variation in 401(k) Plan Managed Account Fees: 

Provider: A; 
Type of fee: Flat fee; 
Example of annual fee charged on $10,000 account balance: $20; 
Example of annual fee charged on $500,000 account balance: $20. 

Provider: B; 
Type of fee: Variable fee,[A] capped[B]; 
Example of annual fee charged on $10,000 account balance: $25; 
Example of annual fee charged on $500,000 account balance: $250. 

Provider: C; 
Type of fee: Variable fee; 
Example of annual fee charged on $10,000 account balance: $10; 
Example of annual fee charged on $500,000 account balance: $500. 

Provider: D; 
Type of fee: Variable fee, direct arrangement[C]; 
Example of annual fee charged on $10,000 account balance: As low as $8; 
Example of annual fee charged on $500,000 account balance: As low as 
$400. 

Type of fee: Variable fee, subadvised arrangement[D]; 
Example of annual fee charged on $10,000 account balance: As high as 
$40; 
Example of annual fee charged on $500,000 account balance: As high as 
$2,000. 

Provider: E; 
Type of fee: Variable fee, tiered,[E] default[E]; 
Example of annual fee charged on $10,000 account balance: As high as 
$35; 
Example of annual fee charged on $500,000 account balance: As high as 
$1,100. 

Type of fee: Variable fee, tiered, opt-in[F]; 
Example of annual fee charged on $10,000 account balance: As high as 
$60; 
Example of annual fee charged on $500,000 account balance: As high as 
$2,350. 

Provider: F; 
Type of fee: Variable fee, tiered; 
Example of annual fee charged on $10,000 account balance: Averages $45-
$50; 
Example of annual fee charged on $500,000 account balance: Averages 
$2,250-$2,500. 

Provider: G; 
Type of fee: Variable fee, default; 
Example of annual fee charged on $10,000 account balance: As low as 
$45; 
Example of annual fee charged on $500,000 account balance: As low as 
$2,250. 

Type of fee: Variable fee, opt-in; 
Example of annual fee charged on $10,000 account balance: As high as 
$55; 
Example of annual fee charged on $500,000 account balance: As high as 
$2,750. 

Provider: H; 
Type of fee: Variable fee, large plan; 
Example of annual fee charged on $10,000 account balance: As low as 
$25; 
Example of annual fee charged on $500,000 account balance: As low as 
$1,250. 

Type of fee: Variable fee, small plan; 
Example of annual fee charged on $10,000 account balance: As high as 
$100; 
Example of annual fee charged on $500,000 account balance: As high as 
$5,000. 

Source: GAO analysis of managed account provider case studies. GAO-14-
310. 

Note: We estimate that these eight providers chosen for our case 
studies represented over 95 percent of the managed account industry in 
defined contribution plans, as measured by assets under management in 
2013. 

[A] Fees can vary based on a number of factors, such as certain plan 
characteristics (i.e., the amount of assets in the plan, the 
percentage of plan participants enrolled in managed accounts) or the 
level of a participant's account balance. 

[B] This provider placed a limit on the fee they charge at a specific 
dollar amount. 

[C] A direct arrangement generally refers to situations where the 
managed account provider contracts directly with the plan sponsor. 

[D] A subadvised arrangement generally describes situations where the 
managed account provider contracts with another plan services 
provider. In this arrangement plan sponsors do not contract directly 
with managed account providers. 

[E] Fees may be tiered, meaning that they generally decrease as a 
participant's account balance increases. 

[F] Fees may vary based on whether or not participants are defaulted 
into managed accounts by the plan sponsor or choose to opt into the 
managed account service. 

[End of table] 

Participants with large account balances whose managed account 
provider caps fees at a certain level benefit more than similar 
participants whose fees are not capped. Of the providers we reviewed 
who charge variable fees, one provider caps the fee at a certain 
amount per year. For example, this provider charges 0.25 percent or 
$25 for every $10,000 in a participant's account, with a maximum of 
$250 per year, so participants who use this provider only pay fees on 
the first $100,000 in their accounts. As a result, the difference in 
fees paid by participants using this provider, or providers who charge 
flat rates, widens as participant account balances increase. 

Plan characteristics can affect fees participants pay to managed 
account providers. For example, at one managed account provider 
included in our review, a participant in a small plan may pay more for 
a managed account than a similar participant in a large plan. 
Similarly, a participant in a plan with high enrollment or that uses 
managed accounts as the default may pay less for a managed account 
than a participant with the same balance in a plan with low enrollment 
or that offers managed accounts as an opt-in service. We also found 
through our case studies that fees can vary based on factors beyond 
the plan's characteristics, such as the types of providers involved in 
offering the managed account, the size of participant account 
balances, and the amount of revenue sharing[Footnote 70] received by 
the managed account provider. Fees calculated through revenue sharing 
can vary in accordance with the investment options the plan sponsor 
chooses to include in the plan and the amount of revenue the provider 
actually receives from these options. In these cases, initial fee 
estimates for the managed account may differ from actual fees they 
pay. In addition, some plan sponsors also pay fees to offer managed 
account services, but since these fees may be paid out of plan assets, 
participants in these plans may pay more than participants in plans 
that do not pay fees.[Footnote 71] 

As shown above, paying higher additional fees to a provider for a 
managed account service offers no guarantee of higher rates of return 
compared to other providers or compared to the reported rates of 
return earned by participants who invest in other professionally 
managed allocations or who self-direct investments in their 401(k) 
accounts. Because the additional fee is charged to participants on a 
recurring basis, such as every quarter or year, the costs incurred 
over time by participants who use managed accounts can accumulate. We 
used fee data reported by managed account providers to illustrate the 
effect that different fees could have on a participant's managed 
account balance over time. As shown in figure 10, a hypothetical 
participant in our illustration who is charged an additional annual 
fee of 1 percent of their account balance for their managed account 
may pay nearly $13,000 more over 20 years than they would have paid in 
any other investment without the managed account fee. This compares to 
about $1,100 in additional fees paid over 20 years by a participant 
who is charged an annual fee of 0.08 percent for a managed account, 
the lowest variable non-capped fee we found.[Footnote 72] 

Figure 10: Variation in Additional Participant Fees Paid for a Managed 
Account Over a 20-Year Period Given Different Fee Rates: 

[Refer to PDF for image: vertical bar graph] 

Managed account fee rate: (1% fee); 
Fees paid: $12,802. 

Managed account fee rate: (.6% fee); 
Fees paid: $7,927. 

Managed account fee rate: (.45% fee); 
Fees paid: $6,016. 

Managed account fee rate: (.37% fee); 
Fees paid: $4,978. 

Managed account fee rate: (.2% fee); 
Fees paid: $2,728. 

Managed account fee rate: (.08% fee); 
Fees paid: $1,102. 

Source: GAO analysis of information from providers and published data 
on managed account fees and returns. GAO-14-310. 

Note: We conducted this analysis assuming that the participant had a 
starting account balance of $17,000 (based on the Employee Benefit 
Research Institute's (EBRI's) estimated median 401(k) account balance 
at year-end 2011), a starting salary of $40,000 (based on the Bureau 
of Labor Statistics' seasonally adjusted median weekly earnings for 
the third quarter of 2013), an average annual salary increase of 1.75 
percent (based on the Bureau of Labor Statistics' salary increase 
estimate for the 12-month period ending September 2013), and a savings 
rate of 9.7 percent (based on EBRI's estimate of an average employee 
savings rate of 6.7 percent for 2012 and a 3 percent average employer 
match). This participant invested over 20 years using a managed 
account service with an annual rate of return of 1.9 percent, which 
represents an average of the average rates of return earned by 
participants with self-directed 401(k) accounts published by Vanguard 
in its 401(k) performance reports for the periods of 2006-2011 and 
2007-2012. We used Vanguard's published data on 5-year annualized 
returns for defined contribution plan participants with professionally 
managed allocations, including managed accounts, and participant-
constructed portfolios, which we refer to as self-directed 401(k) 
accounts. The 5-year returns data include portfolio returns from the 
recession of 2007-2008. Return results would likely be different if 
data from 2007-2008 were not included in the analysis. Information 
provided by Vanguard is from a limited dataset that can only describe 
the portfolio performance for Vanguard defined contribution plan 
participants with these types of retirement portfolios over a finite 
period of time. These data are not representative of the portfolio 
performance of the universe of defined contribution plan participants 
or for other periods of time. See Vanguard, Professionally Managed 
Allocations and the Dispersion of Participant Portfolios (Valley 
Forge, PA: August 2013) and Vanguard, Target Date Funds and the 
Dispersion of Participant Portfolios (Valley Forge, PA: November 2012). 

[End of figure] 

Lack of a Requirement for Performance and Benchmarking Information 
Inhibits Participant Evaluation of Managed Accounts: 

The limited availability of returns-based performance data and lack of 
standard metrics can also offset the reported advantages of managed 
accounts. In its final rule on participant-level disclosures, DOL 
requires that sponsors disclose performance data to help participants 
make informed decisions about the management of their individual 
accounts and the investment of their retirement savings, and that 
sponsors provide appropriate benchmarks to help participants assess 
the various investment options available under their plan.[Footnote 
73] By requiring sponsors to provide participants with performance 
data and benchmarking information for 401(k) investments, DOL intends 
to reduce the time required for participants to collect and organize 
fee and performance information and increase participants' efficiency 
in choosing investment options that will provide the highest value. 

Since the applicability date of the participant-level disclosure 
regulation, for most plans in 2012, DOL has required plan sponsors to 
provide participants who invest in a designated investment alternative 
in their 401(k) account with an annual disclosure describing the fees, 
expenses, and performance of each of the investment funds available to 
them in the plan.[Footnote 74] DOL defines a designated investment 
alternative as any investment alternative designated by the plan into 
which participants and beneficiaries may direct the investment of 
assets held in, or contributed to, their individual accounts.[Footnote 
75] For designated investment alternatives, plan sponsors are required 
to disclose to participants specific information identifying the funds 
available to them in the plan, results-based performance information 
over varying time periods, and performance benchmarks in a way that 
invites comparison with established benchmarks and market indexes, as 
shown in table 5. 

Table 5: Examples of Plan and Investment-Related Information Plan 
Sponsors Are Required to Disclose to Participants with 401(k) 
Investments: 

Type of information: Identifying information; 
Requirement: 
* The name of each designated investment alternative[A]; 
* The type or category of the investment (e.g., money market fund, 
balanced fund (stocks and bonds), large cap stock fund, employer stock 
fund, employer securities). 

Type of information: Performance data[B]; 
Requirement: 
* For designated investment alternatives with respect to which the 
return is not fixed, the average annual total return of the investment 
for 1-, 5-, and 10-calendar year periods (or for the life of the 
alternative, if shorter) ending on the date of the most recently 
completed calendar year; 
* A statement indicating that an investment's past performance is not 
necessarily an indication of how the investment will perform in the 
future. 

Type of information: Benchmarks[B]; 
Requirement: 
* Standard: For designated investment alternatives with respect to 
which the return is not fixed, the name and returns of an appropriate 
broad based securities market index over the 1-, 5-, and 10-calendar 
year periods (or for the life of the alternative, if shorter), which 
is not administered by an affiliate of the investment issuer, its 
investment adviser, or a principal underwriter, unless the index is 
widely recognized and used; 
* Custom: In the case of designated investment alternatives that have 
a mix of equity and fixed income exposure (e.g., balanced funds or 
target date funds), a plan administrator may blend the returns of more 
than one appropriate broad-based index and present the blended returns 
along with the returns of the required benchmark, provided that the 
blended returns reflect the proportion of actual equity and fixed-
income holdings of the designated investment alternative. For example, 
where a balanced fund's equity-to-bond ratio is 60: 40, the returns of 
an appropriate bond index and an appropriate equity index may be 
blended in the same ratio and presented along with the benchmark 
returns. 

Source: GAO analysis of DOL regulations at 29 C.F.R. § 2550.404a-
5(d)(1)(i),(ii), and (iii). | GAO-14-310: 

[A] DOL defines a designated investment alternative as any investment 
alternative designated by the plan into which participants and 
beneficiaries may direct the investment of assets held in, or 
contributed to, their individual accounts. 29 C.F.R. § 2550.404a-
5(h)(4). 

[B] Plan sponsors are required to furnish this information to 
participants in a chart or similar format that is designed to 
facilitate comparison of such information for each designated 
investment alternative offered under the plan. 29 C.F.R. § 2550.404a-
5(d)(2)(i). The final rule includes a Model Comparative Chart plan 
sponsors may elect to use to satisfy this requirement. See 75 Fed. 
Reg. 64,942. 

[End of table] 

Despite DOL's requirements for designated investment alternatives, 
with respect to managed accounts offered either as an opt-in or 
default service, plan sponsors are generally only required to disclose 
to 401(k) participants the identity of the managed account provider or 
investment manager and any fees and expenses associated with its 
management. Neither plan sponsors nor managed account providers are 
required to isolate within the participant-level disclosure investment-
related information on the individual funds that comprise the 
participant's managed account or present aggregate performance of the 
account for a given period. DOL generally does not consider most 
managed accounts to be designated investment alternatives. Instead, 
according to DOL, managed account providers are generally considered 
to be designated investment managers as they provide a service to 
participants rather than an investment option, such as a mutual 
fund.[Footnote 76] As a result, the investment-related information 
required in DOL's participant-level disclosure regulation does not 
apply to investment services, such as many managed accounts. 

Because DOL does not require plan sponsors to provide participants 
information on the performance of their managed accounts or to compare 
performance against a set of standard benchmarks, it is potentially 
difficult for participants to evaluate whether the additional fees for 
managed accounts are worth paying, considering the effect of fees on 
returns and retirement account balances. As a result, participants may 
be unable to effectively assess the overall value of the service and 
to compare performance against a set of standard benchmarks. Not all 
of the retirement readiness statements we reviewed included returns-
based performance data or information on the amount of additional fees 
the participant had paid for the service.[Footnote 77] Some managed 
account providers did include projections of a participant's future 
retirement income on these statements. Even though the projections may 
be based on sound methodologies, if standard returns-based performance 
data are absent from these statements, participants will have to rely 
primarily on these projections to gauge the overall value of the 
service. Without performance and benchmarking information presented in 
a format designed to help participants compare and evaluate their 
managed account, participants cannot make informed decisions about the 
managed account service. 

Likewise, with respect to QDIAs, DOL only requires plan sponsors to 
disclose to participants a description of each investment's 
objectives, risk and return characteristics (if applicable), fees and 
expenses paid to providers, and the right of the participant to elect 
not to have such contributions made on their behalf, among other 
things.[Footnote 78] In 2010, DOL proposed amendments to its QDIA 
disclosure requirements that would, with respect to target date funds 
or similar investments, require sponsors to provide participants 
historical returns-based performance data (e.g., 1-, 5-, and 10-year 
returns).[Footnote 79] According to DOL officials, the proposed QDIA 
rule change may apply to managed accounts offered as a QDIA to 
participants. However, the proposed requirements as written may be 
difficult for plan sponsors to implement because they are not tailored 
specifically for managed accounts.[Footnote 80] One participant 
advocacy group noted that, without similar information, participants 
may not be able to effectively assess managed account performance over 
time and compare that performance to other professionally managed 
investment options available under the plan or across different 
managed account providers.[Footnote 81] 

As mentioned above, DOL affirms in the participant-level disclosure 
regulation that performance data are required to help participants in 
401(k) plans to make informed decisions about managing investments in 
their retirement accounts, and that appropriate benchmarks are helpful 
tools participants can use to assess the various investment options 
available under their plan.[Footnote 82] The benefits outlined in the 
participant-level disclosure regulation would also apply to the 
proposed changes to the QDIA regulation. Specifically, DOL expects 
that the enhanced disclosures required by the proposed regulation 
would benefit participants by providing them with critical information 
they need to evaluate the quality of investments offered as QDIAs, 
leading to improved investment results and retirement planning 
decisions by participants. DOL believes that the disclosures under the 
proposed regulation, combined with performance reporting requirement 
in the participant-level disclosure regulation, would allow 
participants to determine whether efficiencies gained through these 
investments are worth the price differential participants generally 
would pay for such funds. However, absent DOL requirements that plan 
sponsors use standard metrics to report on the performance of managed 
accounts for participants who are defaulted into the service as a 
QDIA, it would be potentially difficult for these participants to 
evaluate the effect that additional fees could have on the performance 
of their managed accounts, including how the additional fees could 
affect returns and retirement account balances, possibly eroding the 
value of the service over time for those participants. 

Improved performance reporting could help participants understand the 
risks associated with the additional fees and possible effects on 
their retirement account balances if the managed accounts 
underperform, which is critical information that participants could 
use to take action to mitigate those risks. Discussions with managed 
account providers suggest that returns-based performance reports and 
custom benchmarking can be provided to managed account participants. 
[Footnote 83] For example, as shown in figure 11, one managed account 
provider we spoke to already furnishes participants access to online 
reports that include returns-based performance data and custom 
benchmarks, which can allow them to compare performance for a given 
period with an established equity index and bond index. Some providers 
told us that it would be difficult to provide participants in managed 
accounts with performance information and benchmarks because their 
retirement portfolios contain highly personalized asset allocations. 
While it may be more challenging for providers to furnish performance 
information on personalized managed accounts compared to model 
portfolios, we identified one participant statement that included 
performance information from a provider who personalizes asset 
allocations for their participants' retirement portfolios. 

Figure 11: Example of Custom Benchmarks and Summary Statistics Used to 
Report Managed Account Performance to Participants: 

[Refer to PDF for image: illustration] 

Portfolio type: designated based on participant risk tolerance and 
personal information (conservative to aggressive plus); 
Portfolios are designated as conservative, moderate, growth, 
aggressive, or aggressive plus. 

Custom benchmark: assigned to each participant portfolio (blend of 
equity and bond indices); 
The custom benchmark is a blend of weighted returns comprised of the 
S&P 500 index for equities and the Barclays Capital US Aggregate Bond 
Index for fixed income securities. Each benchmark is customized to 
represent a different proportion of equities and fixed income 
securities found in a participant's portfolio.[A] 

Annualized returns: provided for portfolio and benchmark over different 
time periods; 
Annualized returns include year-to-date, 1-year, 3-year, 5-year, 10-
year, and since inception returns for the portfolio and custom 
benchmark, net of all fees paid by the participant or sponsor. 

Performance summary statistics: compare portfolio performance to 
benchmark and market performance; 
Summary statistics include an excess return statistic for the 
portfolio relative to the return of the benchmark, a measure of the 
portfolio's risk in relation to the market, and a measure of the 
percentage of a portfolio's movement that can be explained by movement 
in the benchmark index. 

Source: R. T. Jones Capital Equities Management, Inc. GAO-14-310. 

[A] For example, if a portfolio designated as growth is made of 
approximately 80 percent equity assets and 20 percent fixed income 
assets, then the corresponding blended custom benchmark could be 
comprised of a weighted average of 80 percent S&P 500 index 
performance and 20 percent Barclays Capital U.S. Aggregate Bond index 
performance. Custom benchmarks for other portfolio types correspond 
similarly. 

[End of figure] 

The provider told us that the blended custom benchmark described in 
figure 11 allows participants to more accurately evaluate and compare 
the aggregate performance of the different individual funds held in 
their managed account because the benchmark is linked to the 
participant's risk tolerance. The online report also describes any 
positive or negative excess returns for the portfolio relative to the 
return of the custom benchmark, net of fees. The provider said that 
the excess return statistic is representative of the value that the 
provider or portfolio manager has added or subtracted from the 
participant's portfolio return for a given period.[Footnote 84] 
Another managed account provider furnishes retirement readiness 
statements that include returns-based information for each of the 
funds in participants' accounts. However, the statement did not 
include standard or custom benchmarks that would allow participants to 
compare the performance of their managed account with other market 
indexes. 

Absent Guidance, Sponsors Face Challenges in Selecting and Overseeing 
Managed Account Providers: 

DOL Has Not Addressed Sponsor Access to Managed Account Provider 
Options: 

Some sponsors report that their choice of a managed account provider 
may be limited to those options--sometimes only one--offered by the 
plan's record keeper.[Footnote 85] Although DOL's general guidance on 
fiduciary responsibilities encourages sponsors to consider several 
potential providers before hiring one,[Footnote 86] six of the 10 
sponsors we interviewed said that they selected a managed account 
provider offered by their record keeper without considering other 
options and two other sponsors said that their record keeper's 
capabilities partially restricted their choice of a provider. Some 
record keepers voluntarily offered sponsors more managed account 
provider options when sponsors asked for them.[Footnote 87] In the 
absence of DOL requiring sponsors to request multiple provider 
options, sponsors said they were reluctant to pursue options not 
offered by their record keeper for a variety of reasons. These reasons 
included: (1) concern that their record keeper's systems might be 
unable to support additional options; (2) familiarity with the current 
provider offered by their record keeper;[Footnote 88] and (3) belief 
that there was no need to consider other options--one sponsor said 
that its record keeper has consistently provided excellent service and 
support for a reasonable fee and, as a result, the sponsor felt 
comfortable accepting the record keeper's recommendation of the 
provider offered on its recordkeeping system. 

Without the ability to choose among multiple providers, sponsors have 
limited choices, which can result in selecting a provider who charges 
participants higher additional fees than other providers who use 
comparable strategies to manage participant investments, which are 
ultimately deducted from participant account balances. In addition, 
limited choices can result in sponsors selecting a provider whose 
strategy does not align with their preferred approach for investing 
participant contributions. For example, a sponsor who endorses a 
conservative investment philosophy for their plan could select a 
provider who uses a more aggressive method for managing participant 
investments. 

Several managed account providers and record keepers said that a 
limited number of providers are offered because, among other things, 
it is costly to integrate 401(k) recordkeeping systems with managed 
account provider systems. In addition, record keepers may offer a 
limited number of providers to avoid losing revenue and because they 
evaluate a provider before deciding to offer its managed account 
service. Such steps include reviewing the provider's investment 
strategy and assessing how the provider interacts with participants. 
One managed account provider estimated that sponsors might have to 
spend $400,000 and wait more than a year before offering the 
provider's managed account to plan participants if it is not already 
available on their record keeper's system. Additionally, record 
keepers may lose target date fund revenue or forgo higher revenue 
opportunities by offering certain managed account providers and may 
believe that offering multiple options is unnecessary once they have 
identified a provider that is effective. 

Although sponsors may have access to a limited number of managed 
account providers on their record keepers' systems, some providers 
have developed approaches that make it easier for record keepers to 
offer more than one managed account option to sponsors. For instance, 
one provider we interviewed, which acts as an intermediary and 
fiduciary, contracts with several other providers and makes all of 
these providers available to its record keepers, thus allowing the 
record keepers' sponsors to choose among several managed account 
providers without incurring additional costs to integrate the record 
keeper with any of the providers.[Footnote 89] Another managed account 
provider has developed a process to transfer information to record 
keepers that does not require integration with the recordkeeping 
system, thus making it less difficult for any record keeper to work 
with them. 

Sponsors Lack Sufficient Guidance from DOL to Inform Their Selection 
and Oversight of Managed Account Providers: 

Available evidence we reviewed suggests that sponsors lack sufficient 
guidance on how to select and oversee managed account providers. 
Several of the sponsors we interviewed said that they were unaware of 
any set list of standards for overseeing managed accounts, so they do 
not follow any standards, and even managed account providers felt that 
sponsors have insufficient knowledge and information to effectively 
select a provider. Because sponsors may not have sufficient knowledge 
and information, record keepers could play a larger role in the 
selection process. In addition, providers indicated that it is 
difficult for sponsors to compare providers and attributed this 
difficulty to the absence of any widely accepted benchmarks or other 
comparison tools for sponsors. Some industry representatives indicated 
that additional guidance could help sponsors better select and oversee 
managed account providers and highlighted specific areas in which 
guidance would be beneficial, such as: 

* determining whether a managed account fee is reasonable; 

* understanding managed accounts and how they function; and: 

* clarifying factors sponsors should consider when selecting a managed 
account provider. 

Although DOL is responsible for assisting and educating sponsors by 
providing them with guidance, it has not issued guidance specific to 
managed accounts, as it has done for target date funds,[Footnote 90] 
even though it has issued general guidance on fiduciary 
responsibilities, including regulations under ERISA 404(a) and 404(c), 
which explicitly state DOL's long-standing position that nothing in 
either regulation serves to relieve a fiduciary from its duty to 
prudently select and monitor any service provider to the plan. DOL 
guidance on target date funds outlines the factors sponsors should 
consider when selecting and monitoring target date funds, such as 
performance and fees, among other things. The absence of similar 
guidance specific to managed accounts has led to inconsistency in 
sponsors' procedures for selecting and overseeing providers and may 
inhibit their ability to select a provider who offers an effective 
service for a reasonable fee. Specifically, without assistance 
regarding what they should focus on, sponsors may not be considering 
factors that DOL considers relevant for making fiduciary decisions, 
such as performance information. For example, sponsors considered a 
range of factors when selecting a managed account provider, including 
record keeper views on the quality of the provider, the provider's 
willingness to serve as a fiduciary, and the managed account 
provider's investment strategy. In addition, as shown in table 6, 
while nearly all of the sponsors said that they considered fees when 
selecting a managed account provider, only 1 of the 10 sponsors we 
interviewed said that they considered performance information when 
selecting a managed account provider. In addition, only half of the 
sponsors we interviewed reported that they take steps to formally 
benchmark fees by, for example, comparing their participants' fees to 
the amount of fees that participants in similarly-sized organizations 
pay. 

Table 6: Comparison of Factors Sponsors Said They Considered When 
Selecting a Managed Account Provider: 

Factors considered: 1. Fees; 
Sponsors: 
1: [Check]; 
2: [Check]; 
3: [Check]; 
4: [Check]; 
5: [Check]; 
6: [Check]; 
7: [Check]; 
8: [Check]; 
9: [Check]; 
10: [A]. 

Factors considered: 2. Provider's investment strategy; 
Sponsors: 
1: [Check]; 
2: [Check]; 
3: [Check]; 
4: [Check]; 
5: [Empty]; 
6: [Empty]; 
7: [Check]; 
8: [Empty]; 
9: [Empty]; 
10: [Empty]. 

Factors considered: 3. Provider's ability to work with the plan's 
record keeper; 
Sponsors: 
1: [Check]; 
2: [Empty]; 
3: [Check]; 
4: [Empty]; 
5: [Check]; 
6: [Empty]; 
7: [Empty]; 
8: [Empty]; 
9: [Check]; 
10: [Empty]. 

Factors considered: 4. Provider's ability to meet the needs of the 
sponsor's workforce; 
Sponsors: 
1: [Check]; 
2: [Empty]; 
3: [Check]; 
4: [Check]; 
5: [Empty]; 
6: [Empty]; 
7: [Empty]; 
8: [Empty]; 
9: [Empty]; 
10: [Check]. 

Factors considered: 5. Provider's independence; 
Sponsors: 
1: [Empty]; 
2: [Check]; 
3: [Check]; 
4: [Empty]; 
5: [Check]; 
6: [Empty]; 
7: [Check]; 
8: [Empty]; 
9: [Empty]; 
10: [Empty]. 

Factors considered: 6. Provider's willingness to serve as a fiduciary; 
Sponsors: 
1: [Check]; 
2: [Empty]; 
3: [Empty]; 
4: [Check]; 
5: [Check]; 
6: [Empty]; 
7: [Empty]; 
8: [Empty]; 
9: [Empty]; 
10: [Empty]. 

Factors considered: 7. Provider reporting; 
Sponsors: 
1: [Check]; 
2: [Check]; 
3: [Empty]; 
4: [Empty]; 
5: [Empty]; 
6: [Empty]; 
7: [Empty]; 
8: [Empty]; 
9: [Empty]; 
10: [Empty]. 

Factors considered: 8. Record keeper views on the provider; 
Sponsors: 
1: [Empty]; 
2: [Empty]; 
3: [Empty]; 
4: [Empty]; 
5: [Empty]; 
6: [Check]; 
7: [Empty]; 
8: [Check]; 
9: [Empty]; 
10: [Empty]. 

Factors considered: 9. Overall quality of provider's services relative 
to others; 
Sponsors: 
1: [Empty]; 
2: [Empty]; 
3: [Empty]; 
4: [Empty]; 
5: [Empty]; 
6: [Empty]; 
7: [Empty]; 
8: [Check]; 
9: [Check]; 
10: [Empty]. 

Factors considered: 10. Provider's size/share of the industry; 
Sponsors: 
1: [Check]; 
2: [Check]; 
3: [Empty]; 
4: [Empty]; 
5: [Empty]; 
6: [Empty]; 
7: [Empty]; 
8: [Empty]; 
9: [Empty]; 
10: [Empty]. 

Factors considered: 11. Provider's ability to accommodate the plan's 
investment options; 
Sponsors: 
1: [Check]; 
2: [Empty]; 
3: [Empty]; 
4: [Empty]; 
5: [Empty]; 
6: [Empty]; 
7: [Empty]; 
8: [Empty]; 
9: [Empty]; 
10: [Empty]. 

Factors considered: 12. Ability of participants to opt out of the 
managed account service; 
Sponsors: 
1: [Empty]; 
2: [Empty]; 
3: [Empty]; 
4: [Empty]; 
5: [Empty]; 
6: [Check]; 
7: [Empty]; 
8: [Empty]; 
9: [Empty]; 
10: [Empty]. 

Factors considered: 13. Familiarity with provider; 
Sponsors: 
1: [Empty]; 
2: [Empty]; 
3: [Empty]; 
4: [Empty]; 
5: [Empty]; 
6: [Empty]; 
7: [Empty]; 
8: [Empty]; 
9: [Empty]; 
10: [Check]. 

Factors considered: 14. Returns-based performance information; 
Sponsors: 
1: [Empty]; 
2: [Empty]; 
3: [Empty]; 
4: [Empty]; 
5: [Empty]; 
6: [Empty]; 
7: [Empty]; 
8: [Empty]; 
9: [Empty]; 
10: [Check]. 

Source: GAO analysis of information obtained from interviews with 
sponsors. GAO-14-310. 

Note: To select sponsors for semi-structured interviews, we conducted 
a non-generalizable survey because a comprehensive list of plan 
sponsors that offer managed accounts did not exist at the time of our 
review. We selected sponsors with a variety of characteristics such as 
plan size (amount of assets in the plan and number of participants in 
the plan), managed account provider used, and method for enrolling 
participants into the managed account service (default or opt-in). See 
appendix I for additional information on our approach for selecting 
sponsors. 

[A] This sponsor said that its managed account provider does not 
charge participants an additional fee for managed account services. 
Thus, fees were not a concern for this sponsor. 

[End of table] 

The extent to which sponsors oversee managed account providers also 
varies. Nearly all of the 10 sponsors we interviewed said that they 
review reports from their managed account provider or record keeper as 
part of their oversight process, and the managed account providers we 
interviewed highlighted the role that these reports play in the 
oversight process.[Footnote 91] Several of these providers noted that 
the reports they provide help sponsors fulfill their fiduciary 
responsibility for oversight. Most sponsors said that they also take 
other steps to oversee managed account providers, such as regularly 
meeting with them. However, only one sponsor said that, as part of its 
oversight activities, it independently evaluates benchmarks, such as 
stock market performance indexes. In addition, even though 
participants generally pay an additional fee for managed account 
services, not all of the sponsors we interviewed said that they 
monitor fees. 

Inconsistent Performance Information Allowed by DOL Hinders Sponsor 
Evaluation of Managed Accounts: 

Some industry representatives indicated that consistent performance 
information could help sponsors more effectively compare prospective 
managed account providers and ultimately improve selection and 
oversight. Similar to the challenges participants face in evaluating 
managed accounts because of a lack of performance information, 
industry representatives said that sponsors need information as well, 
including: 

* useful, comparative performance information and a standard set of 
metrics to select suitable providers; 

* access to standard performance benchmarks to monitor them; and: 

* access to comparable managed account performance information to 
evaluate performance. 

Some providers highlighted challenges with providing performance 
information on managed accounts and, as a result, furnish sponsors 
with other types of information to demonstrate their value to 
participants. For example, providers may not furnish returns-based 
performance information to demonstrate how their offerings have 
affected participants because the personalized nature of managed 
accounts makes it difficult to measure performance. In lieu of 
providing returns-based performance information, providers furnish 
sponsors with changes in portfolio risk levels and diversification, 
changes in participant savings rates, and retirement readiness. One 
managed account provider said that it does not believe there is a way 
to measure the performance of managed accounts, noting that it 
develops 20 to 50 investment portfolios for any given plan based on 
the investment options available in the plan. 

Nonetheless, a few providers voluntarily furnish sponsors with returns-
based performance information.[Footnote 92] One provider that used 
broad-based market indexes and customized benchmarks noted that it 
would be difficult for a sponsor to select a managed account provider 
without being able to judge how the provider has performed in the 
past. In addition, this provider, unlike some other providers, noted 
that the personalized nature of some managed accounts does not 
preclude managed account providers from being able to generate returns-
based performance information. For example, even though plans may 
differ, providers can collect information from record keepers for each 
of the plans that offer managed accounts and create aggregate returns 
data, which could then be disclosed to sponsors along with an 
explanation of how the data were generated. As shown in figure 12, the 
report that this provider distributes to sponsors contains an array of 
performance information for participant portfolios, including rates of 
return earned by the portfolios for multiple time periods and 
benchmarks. In addition, the report provides a description of the 
benchmarks--broad-based market indexes as well as customized 
benchmarks. 

Figure 12: Example of Returns-Based Performance Information Provided 
to Sponsors by One Provider: 

[Refer to PDF for image: illustration] 

Provides returns-based performance information for participant 
portfolios and identifies relevant benchmarks. 

Provides returns-based performance information for broad-based and 
customized benchmarks. 

Provides a description of the benchmarks. 

Source: R.T. Jones Capital Equities Management, Inc. GAO-14-310. 

[End of figure] 

DOL regulations require that service providers furnish sponsors with 
performance and benchmarking information for the investment options 
available in the plan.[Footnote 93] DOL maintains that sponsors need 
this information in order to make better decisions when selecting and 
monitoring providers for their plans. However, DOL regulations 
generally do not require managed account providers to furnish sponsors 
with performance and benchmarking information for managed accounts 
because, as previously noted, managed accounts are not considered to 
be designated investment alternatives. Without this information, 
sponsors cannot effectively compare different providers when making a 
selection or adequately determine whether their managed account 
offerings are having a positive effect on participant retirement 
savings, as they can currently determine with the designated 
investment alternatives available in the plan. 

Conclusions: 

Managed accounts can be useful services and may offer some advantages 
for 401(k) participants. They build diversified portfolios for 
participants, help them make investment decisions, select appropriate 
asset allocations, and estimate the amount they need to contribute to 
achieve a secure retirement. Given these potential advantages, it is 
no surprise that the number of managed account providers has grown and 
that plan sponsors, seeking to provide the best options for plan 
participants, have increasingly offered managed accounts. The extent 
to which managed accounts benefit participants may depend on the 
participant's level of engagement and ability to increase their 
savings. Despite the potential advantages, better protections are 
needed to ensure that participants realize their retirement goals. 
These protections are especially important as additional fees for this 
service can slow or erode participants' accumulated retirement savings 
over time. 

Helping plan sponsors understand and make appropriate decisions about 
managed accounts can better ensure that participants are able to reap 
the full advantages of managed accounts. Since plan sponsors select a 
managed account provider, participants who use these services are 
subject to that managed account provider's structure and strategies 
for allocating participant assets, which can potentially affect 
participants' ability to save for retirement, especially if they pay 
high fees. Some participants cannot be assured that they are receiving 
impartial managed account services or are able to rely on accountable 
investment professionals taking on appropriate fiduciary 
responsibilities. Clarifying fiduciary roles for providers who offer 
managed accounts to participants on an opt-in basis or for providers 
who offer additional services to participants in or near retirement 
could help ensure that sponsors have a clear understanding of provider 
responsibilities so they can offer the best services to their 
participants. 

DOL can also help sponsors gain clarity and confidence in selecting 
and monitoring managed account providers. This is particularly salient 
since managed accounts can be complicated service arrangements and 
there are considerable structural differences among the managed 
account options offered by providers. By requiring sponsors to request 
multiple provider options from their record keeper, DOL can help 
ensure that sponsors thoroughly evaluate managed account providers 
before they are offered to participants. In addition, providing 
sponsors with guidance that clarifies standards and suggests actions 
for prudently selecting and overseeing managed account providers, such 
as documenting their processes and understanding the strategies used 
in the managed account, positions sponsors to better navigate their 
fiduciary responsibilities. Additional guidance also positions 
sponsors to consider additional factors when choosing to default 
participants into managed accounts. Supplementing this guidance by 
requiring providers to furnish consistent performance information to 
sponsors so that they can more effectively compare providers can 
assist sponsors in their efforts to provide a beneficial service that 
could help preserve and potentially enhance participants' retirement 
security. 

Finally, DOL can also help participants evaluate whether their managed 
account service is beneficial. Without standardized performance and 
benchmarking information, participants may not be able to effectively 
assess the performance of their managed account and determine whether 
the additional fee for the service is worth paying. For participants 
who opt into managed accounts, this information could help them more 
effectively assess the performance of their managed account and 
compare that performance to other professionally managed alternatives 
that may be less expensive, such as target date funds. Alternatively, 
for participants who are defaulted into managed accounts, this 
information could be valuable when they start to pay more attention to 
their retirement savings. 

Recommendations for Executive Action: 

To better protect plan sponsors and participants who use managed 
account services, we recommend that the Secretary of Labor direct the 
Assistant Secretary for the Employee Benefits Security Administration 
(EBSA) to: 

a) Review provider practices related to additional managed account 
services offered to participants in or near retirement, with the aim 
of determining whether conflicts of interest exist and, if it 
determines it is necessary, taking the appropriate action to remedy 
the issue. 

b) Consider the fiduciary status of managed account providers when 
they offer services on an opt-in basis and, if necessary, make 
regulatory changes or provide guidance to address any issues. 

To help sponsors who offer managed account services or who are 
considering doing so better protect their 401(k) plan participants, we 
recommend that the Secretary of Labor direct the Assistant Secretary 
for EBSA to: 

c) Provide guidance to plan sponsors for selecting and overseeing 
managed account providers that addresses: (1) the importance of 
considering multiple providers when choosing a managed account 
provider, (2) factors to consider when offering managed accounts as a 
QDIA or on an opt-in basis, and (3) approaches for evaluating the 
services of managed account providers. 

d) Require plan sponsors to request from record keepers more than one 
managed account provider option, and notify the Department of Labor if 
record keepers fail to do so. 

To help sponsors and participants more effectively assess the 
performance of managed accounts, we recommend that the Secretary of 
Labor direct the Assistant Secretary for EBSA to: 

e) Amend participant disclosure regulations to require that sponsors 
furnish standardized performance and benchmarking information to 
participants. To accomplish this, EBSA could promulgate regulations 
that would require sponsors who offer managed account services to 
provide their participants with standardized performance and 
benchmarking information on managed accounts. For example, sponsors 
could periodically furnish each managed account participant with the 
aggregate performance of participants' managed account portfolios and 
returns for broad-based securities market indexes and applicable 
customized benchmarks, based on those benchmarks provided for the 
plan's designated investment alternatives. 

f) Amend service provider disclosure regulations to require that 
providers furnish standardized performance and benchmarking 
information to sponsors. To accomplish this, EBSA could promulgate 
regulations that would require service providers to disclose to 
sponsors standardized performance and benchmarking information on 
managed accounts. For example, providers could, prior to selection and 
periodically thereafter, as applicable, furnish sponsors with 
aggregated returns for generalized conservative, moderate, and 
aggressive portfolios, actual managed account portfolio returns for 
each of the sponsor's participants, and returns for broad-based 
securities market indexes and applicable customized benchmarks, based 
on those benchmarks provided for the plan's designated investment 
alternatives. 

Agency Comments and Our Evaluation: 

We provided a draft of this report to the Department of Labor, the 
Department of the Treasury, the Securities and Exchange Commission, 
and the Consumer Financial Protection Bureau for review and comment. 
The Department of the Treasury and the Consumer Financial Protection 
Bureau did not have any comments. DOL and SEC provided technical 
comments, which we have incorporated where appropriate. DOL also 
provided written comments, which are reproduced in appendix IV. As 
stated in its letter, DOL agreed with our recommendations and will 
consider each of them as it moves forward with a number of projects. 

In response to our recommendation that DOL review provider practices 
related to additional managed account services offered to participants 
in or near retirement to determine whether conflicts of interest 
exist, DOL agreed to include these practices in its current review of 
investment advice conflicts of interest, noting that such conflicts 
continue to be a concern. Regarding our second recommendation, to 
consider the fiduciary status of managed account providers when they 
offer services on an opt-in basis, DOL agreed to review existing 
guidance and consider whether additional guidance is needed in light 
of the various business models we described. By considering managed 
account service provider practices and fiduciary roles in its current 
efforts and taking any necessary action to address potential issues, 
we believe DOL will help ensure that sponsors and participants receive 
unconflicted managed account services from qualified managers. 

DOL also agreed to consider our other recommendations in connection 
with its current regulatory project on standards for brokerage windows 
in participant-directed individual account plans. We believe that this 
project may be a good starting point for requesting additional 
information and considering adjustments to those managed account 
services participants obtain from advisers through brokerage windows. 
As we noted in our report, we did not include these types of managed 
accounts in our review because the plan sponsor is not usually 
involved in the selection and monitoring of these advisers. Since 
participants can obtain managed account services without using a 
brokerage window, we encourage DOL to also consider our third and 
fourth recommendations outside of the context of brokerage windows. 
Providing guidance to sponsors for selecting and overseeing managed 
account providers, as suggested by our third recommendation, may help 
sponsors understand their fiduciary responsibilities with respect to 
managed accounts. Similarly, requiring plan sponsors to ask for more 
than one choice of managed account provider, as suggested by our 
fourth recommendation, could encourage record keepers to offer 
additional choices. By taking the steps outlined in these 
recommendations, DOL can help ensure that participants are being 
offered effective managed account services for reasonable fees. 

With respect to our recommendation requiring plan sponsors to ask for 
more than one choice of managed account provider, DOL noted that it 
needs to review the extent of its legal authority to effectively 
require plans to have more than one managed account service provider. 
We continue to believe that the action we suggest in our 
recommendation--that DOL simply require plan sponsors to ask for more 
than one choice of a provider, which is slightly different than how 
DOL has characterized it--may be an effective method of broadening 
plan sponsors' choices of managed account providers. However, we agree 
that DOL should examine the scope of its existing authority in 
considering how it might implement this recommendation. 

Finally, DOL agreed to consider our recommendations on the disclosure 
of performance and benchmarking information on managed accounts to 
participants and sponsors in connection with its open proposed 
rulemaking project involving the qualified default investment 
alternative and participant-level disclosure regulations. We believe 
that DOL's consideration of these recommendations in connection with 
this rulemaking project will be helpful for participants and sponsors, 
and encourage DOL to include managed accounts in this rulemaking. 
Although managed accounts are different than target date funds in 
multiple ways, as presented in our report, we believe that managed 
account providers can and should provide some level of performance and 
benchmarking information to sponsors--and sponsors to participants--to 
describe how managed accounts perform over time and the risks 
associated with the service. In addition, to the extent that managed 
accounts offered on an opt-in basis are not covered by DOL's project, 
we encourage DOL to consider adopting similar changes to the 
participant-level disclosures for those managed accounts that are not 
governed by QDIA regulations. 

As arranged with your office, unless you publicly announce its 
contents earlier, we plan no further distribution of this report until 
30 days from the date of this letter. At that time, we will send 
copies of this report to appropriate congressional committees, the 
Secretary of Labor, the Secretary of the Treasury, the Chair of the 
Securities and Exchange Commission, the Director of the Consumer 
Financial Protection Bureau, and other interested parties. In 
addition, the report will be available at no charge on GAO's website 
at [hyperlink, http://www.gao.gov]. If you or your staff members have 
any questions about this report, please contact me at (202) 512-7215 
or jeszeckc@gao.gov. Contact points for our Offices of Congressional 
Relations and Public Affairs may be found on the last page of this 
report. GAO staff who made key contributions to this report are listed 
in appendix V. 

Sincerely yours, 

Signed by: 

Charles A. Jeszeck: 
Director: 
Education, Workforce, and Income Security: 

[End of section] 

Appendix I: Objectives, Scope, and Methodology: 

Our objectives for this study were to determine (1) how service 
providers structure managed accounts, (2) the advantages and 
disadvantages of managed accounts for 401(k) participants, and (3) the 
challenges, if any, that plan sponsors face in selecting and 
overseeing managed account providers. 

To answer our research objectives we undertook several different 
approaches. We reviewed relevant research and federal laws, 
regulations, and guidance on managed accounts in 401(k) plans. We 
reviewed available documentation on the structure of managed accounts 
in 401(k) plans and the role of service providers, including 
Securities and Exchange Commission (SEC) filings of the Form ADV by 30 
record keepers, managed account providers, and other related service 
providers.[Footnote 94] We interviewed industry representatives and 
service providers involved with managed accounts--including record 
keepers, academics, industry research firms, and participant advocacy 
groups--and government officials from the Department of Labor's 
Employee Benefits Security Administration (EBSA), SEC, the Department 
of the Treasury, and the Consumer Financial Protection Bureau. 

Case Studies of Managed Account Providers: 

To examine key issues related to how managed accounts in 401(k) plans 
are structured, we conducted in-depth case studies of eight selected 
managed account providers.[Footnote 95] Since we were unable to 
identify a comprehensive list of managed account providers that 
provide services to 401(k) plans, to select providers for case studies 
we first developed a list of 14 managed account providers based on 
discussions with two industry research firms and our own analysis of 
information from record keeper websites and other publicly available 
documentation. To assess the reliability of these data, we interviewed 
the two industry research firms and compared their information with 
the results of our analysis for corroboration and reasonableness. We 
determined that the data we used were sufficiently reliable for 
selecting managed account providers for case studies. From the list of 
14 providers, we selected 10 providers based on their size, location, 
and legal and fee structures, from which we used eight as the basis 
for our case studies. According to our estimates, the eight managed 
account providers we included in the case studies represented over 95 
percent of the managed account industry in defined contribution plans, 
as measured by assets under management in 2013. 

In conducting case studies of managed account providers, we 
interviewed representatives of the managed account provider and chose 
five providers for site visits based on their locations and size. We 
also reviewed publicly available documentation describing the nature 
of the managed account and sample reports furnished by providers, 
confirmed the type of information these providers consider when 
managing a participant's account, and analyzed fee data furnished by 
managed account providers. To assess the reliability of the fee data 
furnished by managed account providers, we corroborated and assessed 
the completeness of reported fee data based on information in provider 
SEC filings and any other relevant documentary evidence, when 
possible. We determined that the data were sufficiently reliable for 
depicting the range and types of fees charged to sponsors and 
participants by providers. In addition, to further understand the 
different strategies and structures of managed accounts, we developed 
and submitted five hypothetical participant scenarios in one 
hypothetical plan to the eight service providers and asked them to 
provide example asset allocations, and advice if practical, for those 
participants. Seven of the eight managed account providers completed 
and returned asset allocations to us. See appendix II for additional 
detail on the development of hypothetical scenarios and results from 
this work. 

Illustrations of Fee and Return Data Over Time: 

To illustrate potential performance outcomes for participants in 
managed accounts, we used available data on actual managed account 
rates of return and fees to show how managed accounts could affect 
401(k) account balances over 20 years. We developed two scenarios, 
isolating the effects of variability in the following factors: 

1. Managed account rates of return - We used annual average managed 
account rates of return ranging from -0.1 percent to 2.4 percent, 
based on published performance data.[Footnote 96] We compared the 
change in account balances for those managed account rates of return 
with the change in account balances for a 1.4 percent rate of return 
experienced by participants who directed their own 401(k) investments. 

2. Managed account fees - We used different fee levels obtained from 
published reports and provider interviews ranging from a low 
additional annual fee of 0.08 percent to a 1 percent annual 
fee.[Footnote 97] We compared fee totals and ending account balances 
for varying fee levels with those of participants who did not pay the 
additional fee because they directed their own 401(k) investments. 

For each scenario, we held all other factors constant by assuming that 
the participant's starting account balance was $17,000 and starting 
salary was $40,000, the salary increased at a rate of 1.75 percent per 
year, and the participant saved 9.7 percent[Footnote 98] of their 
salary each year.[Footnote 99] To the extent possible, we developed 
scenarios using information provided to us during interviews with 
industry representatives or found in published reports on managed 
accounts or on other economic factors. To assess the reliability of 
these data, we considered the reliability and familiarity of the 
source of the data or information and, when necessary, interviewed 
representatives of those sources about their methods, internal 
controls, and results. Based on these interviews and our review of 
published data, we determined that the data we used were sufficiently 
reliable for use in these illustrations. 

Because this work presents simplified illustrations of potential 
effects on participants over time, we used nominal dollar amounts over 
20 years and did not take into account inflation or changes in 
interest rates. Similarly, to minimize effects of percentage 
growth/loss sequencing on account balances, we applied the same rates 
of return to each of the 20 years for each scenario. The rates of 
returns we used in both scenarios already incorporated different asset 
allocations for participants with a managed account or a self-directed 
401(k) account. This work does not attempt to specify or adjust these 
specific asset allocations. 

Semi-Structured Interviews with Plan Sponsors: 

To identify the advantages and disadvantages of managed accounts for 
401(k) plan participants and any challenges sponsors face in selecting 
and overseeing managed account providers, we conducted semi-structured 
interviews with 12 plan sponsors. Our process for interviewing plan 
sponsors involved multiple steps, as outlined below. 

Sponsor Selection: 

Since a comprehensive list of sponsors that managed accounts did not 
exist at the time of our review, to select sponsors for semi-
structured interviews, we conducted a non-generalizable survey 
facilitated by PLANSPONSOR, a member organization.[Footnote 100] The 
survey included questions about sponsors' 401(k) plans, such as the 
amount of assets included in the 401(k) plan and the number of 
participants in the plan, and the reasons why sponsors decided to 
offer, or not offer, managed accounts to 401(k) plan participants. To 
minimize errors arising from differences in how survey questions might 
be interpreted and to reduce variability in responses that should be 
qualitatively the same, we conducted pretests with industry 
representatives. Based on feedback from these pretests, we revised the 
survey in order to improve question clarity. PLANSPONSOR included a 
link to our survey in an e-mail that was sent to approximately 60,000 
of its subscribers. In addition, PLANSPONSOR promoted the survey eight 
times over 4 weeks between June 3 and June 28, 2013. A record keeper 
and one industry association also agreed to forward a link to our 
survey to their clients and members, respectively. 

Fifty-seven sponsors completed our survey, and 25 of them provided 
contact information, indicating they were willing to speak with us. 
Forty-eight sponsors indicated that they offer managed accounts to 
their 401(k) plan participants, and 20 of these sponsors provided us 
with their contact information. Nine sponsors indicated that they do 
not offer managed accounts to their 401(k) plan participants, and five 
of these sponsors provided us with their contact information. 

We reviewed the survey responses of those sponsors willing to speak 
with us and selected sponsors to interview based on the following 
characteristics: 

* Plan size (assets in the plan, number of participants): 

* Managed account provider: 

* Enrollment method (Qualified Default Investment Alternative, or 
QDIA, vs. opt-in): 

* Length of time sponsors have been offering managed accounts: 

To obtain a variety of perspectives, we selected at least two sponsors 
with any given characteristic to the extent possible. For instance, we 
selected several (1) sponsors of varying sizes in terms of the amount 
of assets included in their 401(k) plans and the number of plan 
participants; (2) sponsors that use different managed account 
providers; and (3) sponsors that have been offering managed accounts 
for more than 5 years. Also, we selected one sponsor that offered 
managed accounts as a default option. In total, we selected 10 
sponsors that offer managed accounts and 2 sponsors that do not offer 
managed accounts, as shown in table 7. 

Table 7: Characteristics of Sponsors Selected for GAO Interviews: 

Sponsors: Sponsor 1; 
Total 401(k) plan assets (range): $100 million or more; 
Number of plan participants (range): 25,000 or more participants; 
Managed account service provider: Provider A; 
Method of offering managed accounts: Opt-in; 
Length of time sponsor has offered managed accounts (range): Between 2 
and 5 years. 

Sponsors: Sponsor 2; 
Total 401(k) plan assets (range): $100 million or more; 
Number of plan participants (range): 2,500 to 24,999 participants; 
Managed account service provider: Provider A; 
Method of offering managed accounts: Opt-in; 
Length of time sponsor has offered managed accounts (range): Less than 
2 years. 

Sponsors: Sponsor 3; 
Total 401(k) plan assets (range): $10 million or more but less than 
$50 million; 
Number of plan participants (range): 50 to 499 participants; 
Managed account service provider: Provider B; 
Method of offering managed accounts: Opt-in; 
Length of time sponsor has offered managed accounts (range): More than 
5 years. 

Sponsors: Sponsor 4; 
Total 401(k) plan assets (range): $1 million or more but less than $10 
million; 
Number of plan participants (range): Fewer than 50 participants; 
Managed account service provider: Provider C; 
Method of offering managed accounts: Opt-in; 
Length of time sponsor has offered managed accounts (range): More than 
5 years. 

Sponsors: Sponsor 5; 
Total 401(k) plan assets (range): $100 million or more; 
Number of plan participants (range): 2,500 to 24,999 participants; 
Managed account service provider: Provider A; 
Method of offering managed accounts: Opt-in; 
Length of time sponsor has offered managed accounts (range): Between 2 
and 5 years. 

Sponsors: Sponsor 6; 
Total 401(k) plan assets (range): $50 million or more but less than 
$100 million; 
Number of plan participants (range): 500 to 2,499 participants; 
Managed account service provider: Provider A; 
Method of offering managed accounts: Opt-in; 
Length of time sponsor has offered managed accounts (range): More than 
5 years. 

Sponsors: Sponsor 7; 
Total 401(k) plan assets (range): $100 million or more; 
Number of plan participants (range): 2,500 to 24,999 participants; 
Managed account service provider: Provider A; 
Method of offering managed accounts: Opt-in; 
Length of time sponsor has offered managed accounts (range): Between 2 
and 5 years. 

Sponsors: Sponsor 8; 
Total 401(k) plan assets (range): $100 million or more; 
Number of plan participants (range): 25,000 or more participants; 
Managed account service provider: Provider A; 
Method of offering managed accounts: Opt-in; 
Length of time sponsor has offered managed accounts (range): More than 
5 years. 

Sponsors: Sponsor 9; 
Total 401(k) plan assets (range): $50 million or more but less than 
$100 million; 
Number of plan participants (range): 500 to 2,499 participants; 
Managed account service provider: Provider D; 
Method of offering managed accounts: Opt-in; 
Length of time sponsor has offered managed accounts (range): More than 
5 years. 

Sponsors: Sponsor 10; 
Total 401(k) plan assets (range): $50 million or more but less than 
$100 million; 
Number of plan participants (range): 2,500 to 24,999 participants; 
Managed account service provider: Provider E; 
Method of offering managed accounts: Default; 
Length of time sponsor has offered managed accounts (range): More than 
5 years. 

Sponsors: Sponsor 11; 
Total 401(k) plan assets (range): $1 million or more but less than $10 
million; 
Number of plan participants (range): Fewer than 50 participants; 
Managed account service provider: N/A[A]; 
Method of offering managed accounts: N/A[A]; 
Length of time sponsor has offered managed accounts (range): N/A[A]. 

Sponsors: Sponsor 12; 
Total 401(k) plan assets (range): $100 million or more; 
Number of plan participants (range): 2,500 to 24,999 participants; 
Managed account service provider: N/A[A]; 
Method of offering managed accounts: N/A[A]; 
Length of time sponsor has offered managed accounts (range): N/A[A]. 

Source: GAO analysis of information obtained from interviews with 
sponsors. GAO-14-310. 

[A] Sponsor does not offer managed accounts. 

[End of table] 

Sponsor Semi-structured Interviews: 

We developed semi-structured interview questions to capture 
information on how sponsors learn about and select managed accounts, 
how they oversee managed accounts, and the advantages and 
disadvantages of managed accounts for participants. We developed 
separate questions for sponsors offering managed accounts and those 
not offering managed accounts. We shared the interview questions with 
three sponsors before we began conducting the semi-structured 
interviews to ensure that the questions were appropriate and 
understandable. We made no substantive changes to the questions based 
on this effort. We interviewed 10 sponsors that offer managed accounts 
and 2 sponsors that do not offer managed accounts. As part of our 
interview process, we also requested and reviewed relevant 
documentation from plan sponsors such as quarterly managed account 
reports from managed account providers or record keepers. 

Participant Survey: 

As part of our approach for determining the advantages and 
disadvantages of managed accounts for 401(k) plan participants, we 
developed a non-generalizable online survey to directly obtain 
participant perspectives on managed accounts, such as the advantages 
and disadvantages of managed accounts for 401(k) plan participants and 
participants' level of satisfaction with their managed account 
offering. However, we did not receive any completed responses to our 
survey. The survey was conducted on a rolling basis from August 1, 
2013 to February 25, 2014--a link to the survey was distributed at 
various points in time. 

We conducted this performance audit from October 2012 through June 
2014 in accordance with generally accepted government auditing 
standards. Those standards require that we plan and perform the audit 
to obtain sufficient, appropriate evidence to provide a reasonable 
basis for our findings and conclusions based on our audit objectives. 
We believe that the evidence obtained provides a reasonable basis for 
our findings and conclusions based on our audit objectives. 

[End of section] 

Appendix II: Methodology and Additional Results from Hypothetical 
Scenarios: 

Participant and Plan Scenarios: 

To understand the different strategies and structures of managed 
accounts, we developed and submitted five hypothetical participant 
scenarios in one hypothetical plan to the eight managed account 
providers chosen for our case studies. Table 8 shows basic information 
provided for the hypothetical participant scenarios 1, 2, and 3. 

Table 8: Basic Information for GAO Hypothetical Participant Scenarios 
Provided to Managed Account Providers: 

Current age; 
Scenario 1: 30; 
Scenario 2: 45; 
Scenario 3: 57. 

Gender; 
Scenario 1: Female; 
Scenario 2: Female; 
Scenario 3: Male. 

401(k) account balance (for sponsor's plan only); 
Scenario 1: $10,000; 
Scenario 2: $60,000; 
Scenario 3: $100,000. 

Initial investments/allocation; 
Scenario 1: 70% equity; 30% fixed; 
Scenario 2: 55% equity; 45% fixed; 
Scenario 3: 43% equity; 57% fixed. 

Current annual salary/compensation; 
Scenario 1: $36,000; 
Scenario 2: $40,000; 
Scenario 3: $52,000. 

Current contribution (as a percent of salary) (6 percent employee 
contribution and 3 percent company match); 
Scenario 1: 9%; 
Scenario 2: 9%; 
Scenario 3: 9%. 

State of residence; 
Scenario 1: CA; 
Scenario 2: CA; 
Scenario 3: CA. 

Source: GAO Analysis of data and information from industry 
representatives and government statistics. GAO-14-310. 

[End of table] 

Table 9 shows the additional personalized information provided to 
managed account providers for hypothetical participant scenarios 1 and 
3. 

Table 9: Additional Personalized Information for GAO Hypothetical 
Participant Scenarios 1 and 3: 

Expected retirement age; 
Scenario 1A: Not provided; 
Scenario 1B: 62; 
Scenario 3A: Not provided; 
Scenario 3B: 62. 

Expected age at death[A]; 
Scenario 1A: Not provided; 
Scenario 1B: 86; 
Scenario 3A: Not provided; 
Scenario 3B: 83. 

Participant-specified risk tolerance (general scale of 1-5, 1 
representing lowest risk and 5 representing highest risk); 
Scenario 1A: Not provided; 
Scenario 1B: 3; 
Scenario 3A: Not provided; 
Scenario 3B: 1. 

Defined benefit plan expected annual payout; 
Scenario 1A: Not provided; 
Scenario 1B: None; 
Scenario 3A: Not provided; 
Scenario 3B: $11,000. 

Outside assets (including retirement and other savings accounts, etc.); 
Scenario 1A: Not provided; 
Scenario 1B: All outside savings, including an IRA from a previous 
job: $11,500; 
Scenario 3A: Not provided; 
Scenario 3B: IRA: $69,000. 

Residential property; 
Scenario 1A: Not provided; 
Scenario 1B: Current renter; 
Scenario 3A: Not provided; 
Scenario 3B: Homeowner with mortgage of $85,000. 

Debt, withdrawal needs, and desired future expenditures; 
Scenario 1A: Not provided; 
Scenario 1B: Non-mortgage debt of $9,700; 
Scenario 3A: Not provided; 
Scenario 3B: Non-mortgage debt of $6,000. 

Spouse/family information; 
Scenario 1A: Not provided; 
Scenario 1B: Single, no children; 
Scenario 3A: Not provided; 
Scenario 3B: Wife (age 56, independent contractor, compensation 
$55,000, expected retirement age 63, $120,000 IRA where risk of 
investments is 3 of 5 on scale noted above). 

Source: GAO Analysis of data and information from industry 
representatives and government statistics and calculators. GAO-14-310. 

[A] A 2009 report sponsored by The Society of Actuaries and The 
Actuarial Foundation notes that individuals tend to underestimate 
their own life expectancy, which may lead managed account providers to 
underestimate their future financial needs. The study recommends that 
financial planning programs that allow users to input their own life 
expectancy, such as those provided by managed account providers, 
should provide information assisting people in doing so and noting 
that many people underestimate their life expectancy, which could 
cause them to underestimate their retirement income needs. The report 
also found large differences in the treatment of longevity risk (which 
includes the risk of outliving one's life savings) and inadequate 
focus on making assets last a lifetime. The report notes that one 
approach to dealing with longevity risk would be to run scenarios with 
death occurring at various ages, such as 80, 90, and 95, rather than 
analyzing a single age at death. See John A. Turner and Hazel A. 
Witte, Retirement Planning Software and Post-Retirement Risks (The 
Society of Actuaries and The Actuarial Foundation: December 2009). 

[End of table] 

Table 10 shows some of the hypothetical plan level information we 
compiled for scenario development. 

Table 10: GAO Hypothetical Plan Information: 

Plan size: Matching contributions; 
$75 million in assets: On the first 6 percent of pay contributed each 
year, the company will match 50 cents for each dollar contributed 
(total of 3 percent company matching contribution). 

Plan size: Administrative fees; 
$75 million in assets: 39 basis points per participant, annually. 

Plan size: Other plan characteristics; 
$75 million in assets: 
* Managed account offered as an opt-in service only; 
* Plan does not allow hardship withdrawals or loans; 
* Plan does not allow company stock investments by plan participants; 
* All participants pay into Social Security. 

Source: GAO Analysis of data and information from industry 
representatives and government statistics. GAO-14-310. 

[End of table] 

In addition, to generate hypothetical plan information, we selected 14 
hypothetical plan investment options from various asset classes, as 
shown in table 11. We selected these mutual funds to represent a range 
of asset classes and based on available information from April 2013 
about whether these funds could be found in 401(k) plans. 

Table 11: GAO Hypothetical Plan Investment Options: 

Large company: 1; Large blend, index fund; 
Expense ratio[A] in basis points (bp): 17 bp[B]. 

Large company: 2; Large blend, index fund; 
Expense ratio[A] in basis points (bp): 9 bp. 

Large company: 3; Large growth fund; 
Expense ratio[A] in basis points (bp): 74 bp. 

Large company: 4; Large blend fund; 
Expense ratio[A] in basis points (bp):62 bp. 

Small, midsize company: 5; Mid value fund; 
Expense ratio[A] in basis points (bp): 79 bp. 

Small, midsize company: 6; Small growth fund; 
Expense ratio[A] in basis points (bp): 92 bp. 

Small, midsize company: 7; Mid growth fund; 
Expense ratio[A] in basis points (bp): 80 bp. 

Bond funds: 8; Intermediate-term bond fund; 
Expense ratio[A] in basis points (bp): 22 bp. 

Bond funds: 9; Inflation-protected bond fund; 
Expense ratio[A] in basis points (bp): 20 bp. 

Bond funds: 10; Intermediate-term bond fund; 
Expense ratio[A] in basis points (bp): 43 bp. 

Foreign and global stock: 11; World stock, large growth fund; 
Expense ratio[A] in basis points (bp): 79 bp. 

Foreign and global stock: 12; World allocation, large blend fund; 
Expense ratio[A] in basis points (bp): 107 bp. 

Foreign and global stock: 13; Foreign large blend fund; 
Expense ratio[A] in basis points (bp): 20 bp. 

Money market fund: 14; Money market fund-taxable; 
Expense ratio[A] in basis points (bp): 36 bp. 

Source: GAO compilation of fund information in January 2014 as 
reported by Morningstar. GAO-14-310. 

[A] The expense ratio is a fund's operating fees as a percentage of 
its assets. 

[B] Basis points are units equal to one hundredth of a percentage 
point. 

Note: These funds represent actual investment options that could have 
been available to 401(k) participants as of January 2014, but we have 
only included a description of each fund based on fund information 
reported by Morningstar. 

[End of table] 

We developed the hypothetical scenarios based on data and information 
from industry representatives--including research firms, other 
industry groups, and providers--and a calculator and statistics 
provided by a number of government agencies. To assess the reliability 
of these data, we considered the reliability and familiarity of the 
source of the data or information and, when necessary, interviewed 
representatives of those sources about their methods, internal 
controls, and results. We determined that the data we used were 
sufficiently reliable for developing hypothetical participant-and plan-
level scenarios. 

Provider Responses: 

We asked all eight managed account providers chosen for our case 
studies to provide example asset allocations and advice, if practical, 
for all five hypothetical participant scenarios. Seven of the eight 
managed account providers completed and returned asset allocations to 
us for the hypothetical scenarios. Five of the seven providers who 
sent allocations furnished two allocations for each scenario, but each 
gave different reasons for doing so. One of the providers furnished 
two allocations for each scenario because they actively manage 
participant allocations given changes in market conditions and their 
allocations could generally range within the two extremes. Another 
provider furnished two allocations for each scenario assuming 
different initial holdings because, for that provider's strategy, a 
person's initial holdings of plan investment options influence the 
provider's recommended allocations, even though both of these 
allocations have the same overall risk and return characteristics. In 
some of the figures presenting results of this work, we have included 
one or both of these two providers' second allocations. For the other 
three providers we have chosen to only include one of their asset 
allocations in the figures presenting the results of this work because 
they did not pertain to managed account service by itself or they did 
not include the full services offered by the managed account. We did, 
however, incorporate the more general understanding we gained from 
these alternate asset allocations in our report findings. 

In addition, a number of providers' systems required that they make 
certain assumptions about participants outside of the hypothetical 
scenario information we provided. In these cases, the assumptions they 
made did differ, sometimes substantially, and this may have affected 
their asset allocation results. For example, to generate a 
participant's goal, providers used varying assumptions of a 
participant's annual salary growth--from 1.5 to 3.5 percent. We did 
not attempt to categorize or eliminate any inconsistencies in provider 
strategies, but instead report their results to show the variation 
that a participant may experience. 

Additional Results: 

As shown in figure 13, the median values of all providers' allocations 
show a downward trend in asset allocations to equity assets and an 
upward trend in asset allocations to fixed income and or cash-like 
assets as participants age. 

Figure 13: Median Allocations for GAO Hypothetical Participant 
Scenarios Show a Downward Trend in Allocations to Equity as the 
Participant Ages: 

[Refer to PDF for image: vertical bar graph] 

Percent allocated: 

Provider allocation: 30 year old; 
Equity: 83%; 
Fixed income: 11%; 
Other, including cash: 6%. 

Provider allocation: 45 year old; 
Equity: 75%; 
Fixed income: 17%; 
Other, including cash: 6%. 

Provider allocation: 57 year old; 
Equity: 58.5%; 
Fixed income: 29.8%; 
Other, including cash: 9%. 

Source: GAO analysis of provider asset allocations. GAO-14-310. 

Note: Since each bar in this figure represents the median result of 
all providers, the sum of the three bars in each scenario does not add 
up to 100. 

[End of figure] 

For each hypothetical participant, we found that providers varied 
widely in their recommendations of specific investment options, but 
participants could be similarly allocated to asset classes, such as 
cash and cash equivalents, equity, and fixed income. For the 
hypothetical 30-year-old participant, select asset allocations were 
presented in the report at figure 5, and all allocations to specific 
investment options are shown in figure 14. 

Figure 14: Provider Allocations to Hypothetical Investment Options for 
a Hypothetical 30-year-old Participant: 

[Refer to PDF for image: vertical bar graph] 

Each bar represents an allocation by a provider to one of the 
hypothetical investment options listed below. Allocations are sorted 
in decreasing order, not by provider. 

Provider allocations to hypothetical investment options, Percent 
allocated: 

Foreign large blend: 
31%; 
25%; 
22%; 
16.5%; 
15%; 
15%; 
10%; 
10%; 
9.3%. 

Intermediate-term bond: 
18%; 
12%; 
10%; 
10%; 
10%; 
8%; 
8%; 
3%. 

Large blend, index: 
30%; 
30%; 
22%; 
22%; 
18%; 
7.5%; 
7%. 

Large blend, index: 
35%; 
27.5%; 
21%; 
20%; 
13.6%; 
8%. 

Mid value: 
12%; 
10%; 
10%; 
7.3%; 
7%; 
5%. 

Small growth: 
10%; 
10%; 
9%; 
7%; 
6%; 
2.5%. 

Mid growth: 
16%; 
11%; 
10%; 
8.2%; 
6%; 
5%. 

Intermediate-term bond: 
18%; 
12%; 
9%; 
5%; 
3%. 

World stock, large growth: 
22%; 
16.8%; 
15%; 
8%; 
7%. 

Large growth: 
6%; 
3.7%; 
3%; 
3%. 

Large blend: 
24%; 
19%; 
8%; 
6%. 

Inflation-protected bond: 
4.5%; 
2%. 

Money market fund: 
40%; 
4.5%. 

World allocation, large blend: 
14%. 

Source: GAO analysis of provider asset allocations. GAO-14-310. 

Note: Seven of the eight managed account providers in our case studies 
submitted asset allocations for the hypothetical participant scenarios 
we developed. Some providers submitted multiple allocations given 
varying assumptions and strategies, and we have included two of those 
providers' second allocations in this figure. Thus, there are nine 
allocations to the first hypothetical investment option, foreign large 
blend. In addition, some investment options have fewer allocations 
because providers did not generally allocate portions of the 
hypothetical participant's account to all investment options. For 
example, only one provider allocated a portion of the hypothetical 
participant's account to the last hypothetical investment option, 
"world allocation, large blend." 

[End of figure] 

However, at the asset class level, six of the eight asset allocations 
for this participant were more aggressive than the initial allocation 
of 70 percent equity and 30 percent fixed income, while two had more 
balanced asset allocations as shown in figure 15. 

Figure 15: Provider Allocations to Asset Classes for a Hypothetical 30-
year-old Participant: 

[Refer to PDF for image: vertical bar graph] 

Percent allocated: 

Provider allocation: 1. 
Equity: 86.7%; 
Fixed income: 7.6%; 
Other, including cash: 5.7%. 

Provider allocation: 2; 
Equity: 84.6%; 
Fixed income: 9.4%; 
Other, including cash: 6.0%. 

Provider allocation: 3; 
Equity: 84.3%; 
Fixed income: 10.2%; 
Other, including cash: 5.5%. 

Provider allocation: 4; 
Equity: 83.0%; 
Fixed income: 10.9%; 
Other, including cash: 6.1%. 

Provider allocation: 5; 
Equity: 80.4%; 
Fixed income: 11.2%; 
Other, including cash: 8.4%. 

Provider allocation: 6; 
Equity: 75.8%; 
Fixed income: 17.6%; 
Other, including cash: 6.7%. 

Provider allocation: Initial allocation; 
Equity: 70%; 
Fixed income: 30%; 
Other, including cash: 0%. 

Provider allocation: 7; 
Equity: 52.2%; 
Fixed income: 37.8%; 
Other, including cash: 10.0%. 

Provider allocation: 8; 
Equity: 47.8%; 
Fixed income: 11%; 
Other, including cash: 41.2%. 

Source: GAO analysis of provider asset allocations. GAO-14-310. 

Note: Seven of the eight managed account providers in our case studies 
submitted asset allocations for the hypothetical participant scenarios 
we developed. Some providers submitted multiple allocations given 
varying assumptions and strategies, and we have included one of those 
providers' second allocations in this figure. 

[End of figure] 

The results were similar for the 45 and 57-year-old hypothetical 
participants. Starting from an initial asset allocation of 55 percent 
equity and 45 percent fixed income, providers reported varying asset 
allocations to investment options for the 45-year-old hypothetical 
participant, as shown in figure 16, and allocations at the asset class 
level shown in figure 17. 

Figure 16: Provider Allocations to Hypothetical Investment Options for 
a Hypothetical 45-year-old Participant: 

[Refer to PDF for image] 

Provider allocations to hypothetical investment options, percent 
allocated: 

Each bar represents an allocation by a provider to one of the 
hypothetical investment options listed below. Allocations are sorted 
in decreasing order, not by provider. 

Foreign large blend: 
29%; 
25%; 
17%; 
15%; 
12%; 
11%; 
10%; 
10%; 
9.3%. 

Large blend, index: 
30%; 
30%; 
23%; 
18%; 
14%; 
7.5%; 
5%; 
4%. 

Intermediate-term bond: 
20%; 
18%; 
17%; 
11%; 
11%; 
10%; 
10%; 
10%. 

Mid growth: 
13%; 
10%; 
10%; 
8.2%; 
6%; 
4%; 
4%. 

Mid value: 
10%; 
9%; 
9%; 
7.3%; 
5%; 
3%. 

Large blend, index: 
35%; 
25%; 
20%; 
14%; 
13.6%; 
5%. 

Small growth: 
10%; 
10%; 
7%; 
5%; 
2.5%. 

Large blend: 
19.1%; 
19%; 
6%; 
5%; 
4%. 

Intermediate-term bond: 
20%; 
18%; 
12%; 
10%; 
6%. 

World stock, large growth: 
16.8%; 
16%; 
13%; 
7%; 
6%. 

Large growth: 
5%; 
3.7%; 
2%; 
2%. 

Inflation-protected bond: 
11%; 
5%; 
5%; 
3%. 

Money market fund: 
40%; 
7%; 
5%. 

Money market fund: 
10%; 
1%. 

Source: GAO analysis of provider asset allocations. GAO-14-310. 

Note: Seven of the eight managed account providers in our case studies 
submitted asset allocations for the hypothetical participant scenarios 
we developed. Some providers submitted multiple allocations given 
varying assumptions and strategies, and we have included two of those 
providers' second allocations in this figure. Thus, there are nine 
allocations to the first hypothetical investment option, foreign large 
blend. In addition, some investment options have fewer allocations 
because providers did not generally allocate portions of the 
hypothetical participant's account to all investment options. For 
example, only two providers allocated a portion of the hypothetical 
participant's account to the 14th investment option, "World 
allocation, large blend." 

[End of figure] 

Figure 17: Provider Allocations to Asset Classes for a Hypothetical 45-
year-old Participant: 

[Refer to PDF for image: vertical bar graph] 

Percent allocated: 

Provider allocation: 1. 
Equity: 84.6%; 
Fixed income: 9.4%; 
Other, including cash: 6%. 

Provider allocation: 2; 
Equity: 83%; 
Fixed income: 10.9%; 
Other, including cash: 6.1%. 

Provider allocation: 3; 
Equity: 79%; 
Fixed income: 15.8%; 
Other, including cash: 5.2%. 

Provider allocation: 4; 
Equity: 75.0%; 
Fixed income: 19.1%; 
Other, including cash: 5.8%. 

Provider allocation: 5; 
Equity: 59.1%; 
Fixed income: 32.9%; 
Other, including cash: 8.0%. 

Provider allocation: 6; 
Equity: 58%; 
Fixed income: 29.7%; 
Other, including cash: 12.3%. 

Provider allocation: Initial allocation; 
Equity: 55%; 
Fixed income: 45%; 
Other, including cash: 0%. 

Provider allocation: 7; 
Equity: 47.8%; 
Fixed income: 11%; 
Other, including cash: 41.2%. 

Provider allocation: 8; 
Equity: 47.4%; 
Fixed income: 42%; 
Other, including cash: 10.5%. 

Source: GAO analysis of provider asset allocations. GAO-14-310. 

Note: Seven of the eight managed account providers in our case studies 
submitted asset allocations for the hypothetical participant scenarios 
we developed. Some providers submitted multiple allocations given 
varying assumptions and strategies, and we have included one of those 
providers' second allocations in this figure. 

[End of figure] 

Starting from initial asset allocation of 43 percent equity and 57 
percent fixed income, figure 18 shows variation in allocations to 
investment options for the 57-year-old hypothetical participant and 
figure 19 shows variation in allocations at the asset class level. 

Figure 18: Provider Allocations to Hypothetical Investment Options for 
a Hypothetical 57-year-old Participant: 

[Refer to PDF for image: vertical bar graph] 

Provider allocations to hypothetical investment options, percent 
allocated: 

Each bar represents an allocation by a provider to one of the 
hypothetical investment options listed below. Allocations are sorted 
in decreasing order, not by provider. 

Foreign large blend: 
24%; 
20%; 
12%; 
12%; 
10%; 
10%; 
10%; 
9%; 
5.7%. 

Intermediate-term bond: 
32%; 
24%; 
21%; 
15%; 
15%; 
15%; 
14%; 
10%; 
8.5%. 

Large blend, index: 
40%; 
20%; 
20%; 
10%; 
9%; 
7%; 
4%; 
2.5%. 

Large blend, index: 
35%; 
20%; 
20%; 
15%; 
8.3%; 
5%. 

Mid value: 
10%; 
9.1%; 
9%; 
9%; 
4%; 
3%. 

Mid growth: 
12%; 
8.9%; 
8%; 
5%; 
4%; 
3%. 

Inflation-protected bond: 
11%; 
7%; 
6%; 
6%; 
4%. 

Intermediate-term bond: 
26%; 
24%; 
23.5%; 
14%; 
10%. 

World stock, large growth: 
13.2%; 
13%; 
12%; 
6%; 
4%. 

Money market fund: 
50%; 
7%; 
6%; 
5%; 
3%. 

Large growth: 
5%; 
2.2%; 
2%; 
2%. 

Small growth: 
7%; 
5%; 
5%; 
5%. 

Large blend: 
17%; 
13.1%; 
5%; 
5%. 

World allocation, large blend: 
8%. 

Source: GAO analysis of provider asset allocations. GAO-14-310. 

Note: Seven of the eight managed account providers in our case studies 
submitted asset allocations for the hypothetical participant scenarios 
we developed. Some providers submitted multiple allocations given 
varying assumptions and strategies, and we have included two of those 
providers' second allocations in this figure. Thus, there are nine 
allocations to the first hypothetical investment option, foreign large 
blend. In addition, some investment options have fewer allocations 
because providers did not generally allocate portions of the 
hypothetical participant's account to all investment options. For 
example, only one provider allocated a portion of the hypothetical 
participant's account to the 14th investment option, "World 
allocation, large blend." 

[End of figure] 

Figure 19: Provider Allocations to Asset Classes for a Hypothetical 57-
year-old Participant: 

[Refer to PDF for image: vertical bar graph] 

Percent allocated: 

Provider allocation: 1. 
Equity: 80.5%; 
Fixed income: 14.0%; 
Other, including cash: 5.5%. 

Provider allocation: 2; 
Equity: 65.8%; 
Fixed income: 25.9%; 
Other, including cash: 8.4%. 

Provider allocation: 3; 
Equity: 64.7%; 
Fixed income: 29.8%; 
Other, including cash: 5.5%. 

Provider allocation: 4; 
Equity: 59.0%; 
Fixed income: 29.5%; 
Other, including cash: 11.6%. 

Provider allocation: 5; 
Equity: 58%; 
Fixed income: 29.7%; 
Other, including cash: 12.3%. 

Provider allocation: 6; 
Equity: 46.5%; 
Fixed income: 45.6%; 
Other, including cash: 7.9%. 

Provider allocation: Initial allocation; 
Equity: 43%; 
Fixed income: 57%; 
Other, including cash: 0%. 

Provider allocation: 7; 
Equity: 38%; 
Fixed income: 50.4%; 
Other, including cash: 11.6%. 

Provider allocation: 8; 
Equity: 33.6%; 
Fixed income: 16.1%; 
Other, including cash: 50.3%. 

Source: GAO analysis of provider asset allocations. GAO-14-310. 

Note: Seven of the eight managed account providers in our case studies 
submitted asset allocations for the hypothetical participant scenarios 
we developed. Some providers submitted multiple allocations given 
varying assumptions and strategies, and we have included one of those 
providers' second allocations in this figure. 

[End of figure] 

[End of section] 

Appendix III: Additional Performance Information from One Record 
Keeper's Report: 

Figure 20: Examples of Annualized Rates of Return from One Record 
Keeper for Different Types of Professionally Managed and Self-directed 
401(k) Portfolios, 2007-2012, Net of Additional Fees: 

[Refer to PDF for image: vertical bar graph] 

Rate of return: 

Performance percentile: 5th; 
Single target date fund: 1.7%; 
Single balanced fund: 2.3%; 
Managed account: 0.2%; 
Self-directed 401(k) account: -1.9%. 

Performance percentile: 25th; 
Single target date fund: 1.7%; 
Single balanced fund: 3.1%; 
Managed account: 1.2%; 
Self-directed 401(k) account: 1.2%. 

Performance percentile: 50th; 
Single target date fund: 2.2%; 
Single balanced fund: 3.3%; 
Managed account: 1.9%; 
Self-directed 401(k) account: 2.3%. 

Performance percentile: 75th; 
Single target date fund: 2.3%; 
Single balanced fund: 3.5%; 
Managed account: 2.4%; 
Self-directed 401(k) account: 3.3%. 

Performance percentile: 95th; 
Single target date fund: 3.7%; 
Single balanced fund: 4.3%; 
Managed account: 3.6%; 
Self-directed 401(k) account: 6.4%. 

Source: GAO representation of Vanguard returns data. GAO-14-310. 

Note: This record keeper offers managed accounts on its platform and 
has issued studies on the aggregate performance of professionally 
managed allocations. Information in these reports is from a limited 
dataset that can only describe the portfolio performance for this 
record keeper's defined contribution plan participants with these 
types of retirement portfolios over a finite period of time. These 
data are not representative of the portfolio performance of the 
universe of defined contribution plan participants or for other 
periods of time. See Vanguard, Professionally Managed Allocations and 
the Dispersion of Participant Portfolios (Valley Forge, PA: August 
2013) and Vanguard, Target Date Funds and the Dispersion of 
Participant Portfolios (Valley Forge, PA: November 2012). These 
studies examine the effect of professionally managed allocations on 
participant portfolio construction in defined contribution plans. 
Professionally managed allocations are participant accounts where 100 
percent of the balance is invested by a professional money manager. 
For these studies, a single target date fund is the most common type 
of professionally managed allocation, but the category also includes 
traditional balanced funds and a managed account advisory service. The 
record keeper's reports also provide performance results for 
participant-constructed portfolios--portfolios that do not have 
professionally managed allocations--which we refer to as self-directed 
401(k) accounts. The 5-year returns data include portfolio returns 
from the recession of 2007-2008. For this reason, the traditional 
balanced fund had generally higher returns over this period because of 
their larger fixed income exposure. Return results would likely be 
different if data from 2007-2008 were not included in the analysis. 

[End of figure] 

Figure 21: Average Annualized Rates of Return from One Record Keeper 
for Different Types of Professionally Managed and Self-directed 401(k) 
Portfolios, 2007-2012, Net of Additional Fees: 

[Refer to PDF for image: vertical bar graph] 

Portfolio type: Single target date fund; 
Average rate of return: 2.2%. 

Portfolio type: Single balanced fund; 
Average rate of return: 3.3%. 

Portfolio type: Managed account; 
Average rate of return: 1.9%. 

Portfolio type: Self-directed 401(k) account; 
Average rate of return: 2.3%. 

Source: GAO representation of Vanguard returns data. GAO-14-310. 

Note: This record keeper offers managed accounts on its platform and 
has issued studies on the aggregate performance of professionally 
managed allocations. Information in these reports is from a limited 
dataset that can only describe the portfolio performance for this 
record keeper's defined contribution plan participants with these 
types of retirement portfolios over a finite period of time. These 
data are not representative of the portfolio performance of the 
universe of defined contribution plan participants or for other 
periods of time. See Vanguard, Professionally Managed Allocations and 
the Dispersion of Participant Portfolios (Valley Forge, PA: August 
2013) and Vanguard, Target Date Funds and the Dispersion of 
Participant Portfolios (Valley Forge, PA: November 2012). These 
studies examine the effect of professionally managed allocations on 
participant portfolio construction in defined contribution plans. 
Professionally managed allocations are participant accounts where 100 
percent of the balance is invested by a professional money manager. 
For these studies, a single target date fund is the most common type 
of professionally managed allocation, but the category also includes 
traditional balanced funds and a managed account advisory service. The 
record keeper's reports also provide performance results for 
participant-constructed portfolios--portfolios that do not have 
professionally managed allocations--which we refer to as self-directed 
401(k) accounts. The 5-year returns data include portfolio returns 
from the recession of 2007-2008. For this reason, the traditional 
balanced fund had generally higher returns over this period because of 
their larger fixed income exposure. Return results would likely be 
different if data from 2007-2008 were not included in the analysis. 

[End of figure] 

[End of section] 

Appendix IV: Comments from the Department of Labor: 

U.S. Department of Labor: 
Assistant Secretary for Employee Benefits Security Administration: 
Washington, D.C. 20210: 

June 11, 2014: 

Charles A. Jeszeck: 
Director, Education, Workforce, and Income Security: 
United States Government Accountability Office: 
Washington, DC 20548: 

Dear Mr. Jeszeck: 

Thank you for the opportunity to review the Government Accountability 
Office's (GAO) draft report entitled "401(k) Plans: Improvements Can 
be Made to Better Protect Participants in Managed Accounts." 

To better protect plan sponsors and participants who use or are 
considering using managed account services, and to help them more 
effectively assess the performance of managed accounts, GAO makes six 
specific recommendations falling into three overall categories. GAO
recommends that the Department of Labor: (1) review and take 
appropriate action regarding managed account service provider 
practices and fiduciary roles, (2) require disclosure of performance 
and benchmarking information to plan sponsors and participants, and 
(3) provide guidance to help sponsors better select and oversee 
managed account providers. 

The first specific recommendation is that the Department of Labor 
(Department) review provider practices related to additional managed 
account services offered to participants in or near retirement, with 
the aim of determining whether conflicts of interest exist and, if it 
determines it is necessary, taking the appropriate action to remedy 
the issue. In the 2010 proposed rule on investment advice conflict of 
interest, the Department requested comments on how this rulemaking 
could address fiduciary recommendations to plan participants that they 
take distributions of plan benefits. See 75 FR 65266 (October 22, 
2010). The subject of conflicts of interest that can arise when 
fiduciaries recommend such actions, including at or near retirement,
continues to be a concern. In our continued review of these issues, we 
will include the practices that relate to additional managed account 
services offered to participants in or near retirement. 

The second recommendation is that the Department consider the 
fiduciary status of managed account providers when they offer services 
on an opt-in basis and, if necessary, make regulatory changes or 
provide guidance to address any issues. In our view, the fiduciary 
status of managed account providers does not differ on the basis of 
whether the managed account is the plan's default investment option or 
whether the participant affirmatively chooses it. The dispositive 
factor for determining the managed account provider's fiduciary status 
under ERISA is whether the provider engages in any conduct described 
in section 3(21) of ERISA. A managed account provider that makes 
investment decisions for specific participants would engage in such
conduct.[Footnote 1] Nonetheless, we will review existing guidance and 
consider whether additional guidance is needed in light of the various 
business models described in your report. 

The third recommendation is that the Department issue guidance to help 
sponsors better select and oversee managed account providers. The 
fourth recommendation is for the Department to require plan sponsors 
to request from record keepers more than one managed account provider
option, and notify the DOL if a record keeper fails to do so. The 
fifth and sixth recommendations are for the Department to amend 
existing regulations to require that sponsors and providers furnish 
standardized performance and benchmarking information on managed
accounts to help participants. 

We will consider the third, fourth, fifth and sixth recommendations in 
connection with our current regulatory project on standards for 
brokerage windows in participant directed individual account plans 
(RIN: 1210-AB59). This project will address whether potential 
regulatory or other guidance for such arrangements may be appropriate. 
As you discuss in footnote 5 of your report, participants using 
brokerage windows could independently obtain managed account services 
for their investments. We intend to start this project by issuing a 
Request for Information (RFI) this year and we will consider whether 
these four recommendations can be explored as part of this RFI. 

In reviewing the fourth recommendation, it will be necessary for DOL 
to consider the extent of its legal authority to effectively require 
that plans have more than one managed account service provider. 

Finally, we will consider the fifth and sixth recommendations in 
connection with our open proposed rulemaking project involving the 
qualified default investment alternative and participant-level fee 
disclosure regulations (RIN:1210-AB38). 

We appreciate your recommendations, and will consider them as we move 
forward. 

Sincerely, 

Signed by: 

Phyllis C. Borzi: 
Assistant Secretary: 

Footnote: 

[1] See, e.g., 29 CFR 2550A04c-5(f) (examples 8 and 9) (involving an 
investment manager selected by the participant, as opposed to a 
default selection) and EBSA Field Assistance Bulletin 2012-02R 
(Question 27) (also involving an investment manager selected by the 
participant). 

[End of section] 

Appendix V: GAO Contact and Staff Acknowledgments: 

Contact: 

Charles A. Jeszeck, Director, (202) 512-7215 or jeszeckc@gao.gov. 

Staff Acknowledgments: 

In addition to the individual above, Tamara Cross (Assistant 
Director), Jessica Gray (Analyst-in-Charge), Ted Burik, Sherwin 
Chapman, and Laura Hoffrey made significant contributions to this 
report. In addition, Cody Goebel, Sharon Hermes, Stuart Kaufman, Kathy 
Leslie, Thomas McCool, Sheila McCoy, Mimi Nguyen, Roger Thomas, Frank 
Todisco, Walter Vance, and Kathleen Van Gelder also contributed to 
this report. 

[End of section] 

Footnotes: 

[1] A recent Congressional Research Service report noted that 
relatively few defined contribution plan participants diversify 
investments across classes of assets or periodically rebalance their 
accounts to maintain appropriate diversification--two recommendations 
made by many financial advisers. The report also noted that even if a 
plan offers a range of low-cost, diversified investment options and 
offers investment education and investment advice, it is not unusual 
for some participants to make investment choices that may prove to be 
unwise in the long run. Congressional Research Service, 401(k) Plans 
and Retirement Savings: Issues for Congress (Washington, D.C.: Jan. 7, 
2011). 

[2] The Plan Sponsor Council of America found in its 49th and 56th 
Annual Profit Sharing and 401(k) Surveys that about 25 percent of 
sponsors offered managed accounts in 2005 but in 2012 this number had 
grown to about 36 percent. 

[3] Service providers are outside entities, such as investment 
companies, banks, or insurance companies that a plan sponsor hires to 
provide some of the services necessary to operate the plan. These 
services include managed accounts, investment management (e.g., 
selecting and managing the securities included in a mutual fund), 
consulting and providing financial advice to the plan sponsor (e.g., 
selecting vendors for investment options or other services), and 
recordkeeping (e.g., tracking individual account contributions), among 
other things. 

[4] In defined contribution plans, benefits are based on contributions 
and the performance of the investments in participants' individual 
accounts. The predominant type of defined contribution plans are 
401(k) plans. 

[5] For the purpose of this report, we focused only on arrangements 
initiated by the plan sponsor for the 401(k) plan--i.e., the 401(k) 
plan sponsor made a decision to offer the managed account to its 
participants, either as a default option or on an opt-in basis. By 
contrast, we did not focus on certain arrangements that could be 
considered managed accounts when the 401(k) plan sponsor was 
uninvolved. For example, if the plan sponsor offers participants the 
use of a brokerage window--arrangements under which participants may 
select investments beyond those designated by the plan, referred to by 
a variety of names, including brokerage window and self-directed 
brokerage account--plan participants could independently contract with 
advisers to manage their retirement savings in the plan. Plan sponsors 
would usually not be involved in the selection and monitoring of these 
advisers. 

[6] The Form ADV is the form used by investment advisers to register 
with both the SEC and state securities authorities. Among other 
things, the form requires investment advisers to prepare narrative 
brochures that provide information such as the types of advisory 
services offered--including managed accounts in 401(k) plans--the 
adviser's fee schedule, disciplinary information, and conflicts of 
interest. This brochure is the primary disclosure document that 
investment advisers provide to their clients. 

[7] PLANSPONSOR is a media and research firm in the retirement 
benefits industry. According to PLANSPONSOR, it has been the nation's 
leading authority on retirement and benefits programs since 1993 and 
is dedicated to helping employers navigate the complex world of 
retirement plan design and strategy on behalf of their employees. 

[8] In 2011, U.S. employers sponsored over 510,000 401(k) plans 
covering more than 61 million workers with more than $3.1 trillion in 
plan assets. U.S. Department of Labor, Employee Benefits Security 
Administration, Private Pension Plan Bulletin: Abstract of 2011 Form 
5500 Annual Reports, Version 1.0 (Washington, D.C.: June 2013). A 
worker who actively participated in a 401(k) plan may participate in 
more than one defined contribution plan and also might participate in 
a defined benefit plan in addition to his or her 401(k) plan. 
Contributions to the defined contribution plan may also be made by 
employers. 

[9] Stable value funds are designed to preserve the total amount of 
participants' contributions, or their principal, while also providing 
steady positive returns. 

[10] There is considerable variation in target date fund portfolio 
construction. See GAO, Defined Contribution Plans: Key Information on 
Target Date Funds as Default Investments Should Be Provided to Plan 
Sponsors and Participants. [hyperlink, 
http://www.gao.gov/products/GAO-11-118] (Washington, D.C.: Jan. 31, 
2011). 

[11] Risk tolerance refers to a participant's ability and willingness 
to lose some or all of his or her original investment in exchange for 
greater potential returns. An aggressive investor--one with a high 
risk tolerance--is more likely to risk losing money in order to get 
better results by, for example, investing a higher portion of assets 
in stocks. By comparison, a conservative investor--one with a low risk 
tolerance--tends to favor investments that will preserve the original 
investment and thus is more likely to invest a higher portion of 
assets in lower risk investment options such as bonds. 

[12] We use the term plan sponsors generally in this report, but in 
some circumstances the requirements would apply to plan sponsors, plan 
fiduciaries, or plan administrators, which may be the same entity or 
different entities, depending on the situation. 

[13] Default Investment Alternatives Under Participant Directed 
Individual Account Plans, 72 Fed. Reg. 60,452 (Oct. 24, 2007) 
(codified at 29 C.F.R. § 2550.404c-5). The final QDIA regulation 
implemented amendments to Title I of ERISA enacted as part of the 
Pension Protection Act of 2006 (PPA). Pub. L. No. 109-280, § 624, 120 
Stat. 780, 980. With the enactment of PPA, section 404(c) of ERISA was 
amended to provide relief afforded by section 404(c)(1) to fiduciaries 
that invest participant assets in certain types of default investment 
alternatives in the absence of participant investment direction. 
Specifically, section 624(a) of PPA added a new section 404(c)(5) to 
ERISA, which provides that, for purposes of section 404(c)(1), a 
participant in an individual account plan shall be treated as 
exercising control over the assets in the account with respect to the 
amount of contributions and earnings which, in the absence of an 
investment election by the participant, are invested by the plan in 
accordance with regulations prescribed by the Secretary of Labor. 
Section 624(a) of PPA also directed that such regulations provide 
guidance on the appropriateness of designating default investments 
that include a mix of asset classes consistent with capital 
preservation or long-term capital appreciation, or a blend of both. 

[14] 29 C.F.R. § 2550.404c-5(e)(4)(i), (ii), and (iii). DOL also 
designated principal preservation products for use by plan sponsors, 
but only within the first 120 days of an individual's participation. 
29 C.F.R. § 2550.404c-5(e)(4)(iv) and (v). DOL explained that the 120 
day timeframe is intended to provide plans a reasonable amount of time 
to effectuate the transfer of a participant's assets to another QDIA. 
See 72 Fed. Reg. 60,464. 

[15] 29 C.F.R. § 2550.404c-5(b)(1). 

[16] 29 C.F.R. § 2550.404c-5(b)(2). 

[17] 29 C.F.R. § 2550.404c-5(c)(3) and (d). A worker who is defaulted 
into a QDIA generally has 90 days to opt out and withdraw any 
contributions (including the earnings on those contributions). These 
amounts will not be subject to the extra tax that normally applies to 
distributions received before age 59½. 26 U.S.C. § 414(w)(2)(B) and 29 
C.F.R. § 2550.404c-5(c)(5)(ii). 

[18] PLANSPONSOR, 2012 Defined Contribution Survey: Looking to the 
Stars (November 2012). 

[19] See generally 29 C.F.R. § 2550.404a-5. Sponsors are required to 
furnish participants with plan-related and investment-related fee 
information annually and with information on administrative and 
individual expenses actually charged to participants' accounts 
quarterly on or before the first date a new participant can first 
direct his or her investments. The purpose of these disclosures is to 
ensure that participants and beneficiaries have access to plan 
information to help them make informed decisions about their 
retirement. For a review of required participant disclosures and 
notices related to 401(k) plans, see GAO, Private Pensions: Clarity of 
Required Reports and Disclosures Could Be Improved, [hyperlink, 
http://www.gao.gov/products/GAO-14-92] (Washington D.C.: Nov. 21, 
2013). 

[20] See generally 29 C.F.R. § 2550.404c-5(c)(3) and (d). In addition 
to providing plan sponsors with relief from certain fiduciary 
responsibilities, these disclosures help ensure that participants and 
beneficiaries are in a position to make informed decisions concerning 
their participation in their employer's plan. 

[21] Reasonable Contract or Arrangement Under Section 408(b)(2)--Fee 
Disclosure, 77 Fed. Reg. 5632 (Feb. 3, 2012)(codified at 29 C.F.R. § 
2550.408b-2(c)). In its fact sheet to the 408(b)(2) disclosure final 
rule, DOL stated that fundamental to the ability of [sponsors to 
fulfill] these obligations is obtaining information sufficient to 
enable them to make informed decisions about an employee benefit 
plan's services, the costs of such services, and the service 
providers. See DOL, EBSA, Fact Sheet, Final Regulation Relating to 
Service Provider Disclosures Under Section 408(b)(2) (Washington, 
D.C.: February 2012). 

[22] Some record keepers contract with an intermediary provider that 
offers the use of multiple managed account providers. 

[23] In this report, such record keepers or intermediary providers are 
not included in the term managed account provider. 

[24] When sponsors default participants into a target date fund the 
manager of that fund may be responsible for making asset allocation 
decisions, but the decision to select the fund for the participant is 
made by the sponsor, not a provider as is the case in a managed 
account. 

[25] See 29 U.S.C § 1104(a). Under ERISA, a fiduciary is anyone who 
has discretionary control or authority over the management or 
administration of an ERISA-covered plan, such as a 401(k) plan, 
including the plan's assets, as well as anyone who, for a fee, renders 
investment advice with respect to a plan. 29 U.S.C. § 1002(21). Plan 
sponsors and other plan fiduciaries have specific responsibilities 
under ERISA. In accordance with ERISA and related DOL regulations and 
guidance, responsibilities of plan sponsors and other fiduciaries may 
include, but are not limited to: selecting and monitoring any service 
providers to the plan; reporting plan information to the federal 
government and to participants; adhering to the plan documents, 
including any investment policy statements; identifying parties-in-
interest to the plan and taking steps to monitor transactions with 
them; selecting and monitoring investment options the plan will offer 
and diversifying plan investments; and ensuring that the services 
provided to their plans are necessary and that the cost of those 
services is reasonable. 

[26] See 29 U.S.C. § 1002(21)(A)(ii) and (38). Depending on the facts 
and circumstances, plan service providers may also play other 
fiduciary roles under 3(21). See 29 U.S.C. § 1002(21)(A)(i) and (iii). 
Both 3(38) and 3(21) fiduciaries are required to act solely in the 
interest of participants and beneficiaries. 

[27] 29 C.F.R. § 2550.404c-5(e)(4)(iii) and (e)(3)(i), and 29 U.S.C. § 
1002(38). 

[28] We estimate that these eight providers represented over 95 
percent of the managed account industry in defined contribution plans, 
as measured by assets under management in 2013. 

[29] The managed account provider may require that the plan sponsor 
add investment option(s) in order to offer the managed account. For 
example, one provider requires sponsors to offer a minimum of 5 asset 
classes in its 401(k) plan investment options, including U.S. equity, 
international equity, intermediate-term bonds, small/mid-cap funds, 
and other bond-type funds (stable value funds, money market funds, or 
long-term bond funds). Representatives of this provider said that 
smaller plans were less likely than larger plans to offer investment 
options in all of these asset classes, and in this case, the provider 
will consult with the plan sponsor to make the necessary changes. This 
consulting or advice is separate from the managed account service. 

[30] Exchange traded funds are similar to mutual funds in that they 
offer investors a way to pool their money in a fund that makes 
investments in stocks, bonds, or other assets and, in return, to 
receive an interest in an investment pool. However, shares of the 
exchange traded funds are traded on a national stock exchange and at 
market prices that may or may not be the same as the net asset value 
of the shares. Unlike traditional mutual funds, exchange traded funds 
do not sell individual shares directly to investors, and investors may 
not redeem individual shares; the funds only issue and redeem their 
shares in large blocks known as creation units. 

[31] Modern portfolio theory is a body of academic and empirical work 
that focuses on choosing a portfolio, not just its individual parts. 
Central components include: (1) the concept of diversification--the 
notion that with a well-chosen group of assets participants may be 
able to limit their losses and reduce fluctuations of investment 
returns without sacrificing too much potential gain, and (2) the 
concept of rebalancing--bringing a participant's portfolio back to an 
appropriate asset allocation mix--because over time some investments 
may become misaligned with the participant's investment goals. 
Rebalancing helps ensure that participant portfolios do not 
overemphasize one or more asset categories by returning the portfolio 
to a comfortable level of risk. 

[32] The highest return for each level of risk comprises the most 
efficient mix of investments, or the efficient frontier. 

[33] Monte Carlo simulation describes the range of outcomes from a 
given asset allocation assuming various inputs for expected returns, 
volatilities, and correlations of investment options in the plan. For 
more information see Stacy L. Schaus, Defining Successful Target Date 
Strategies For Defined Contribution Plans: Putting Participants on the 
Optimal Glide Path (Hoboken, NJ: 2010). More information on other 
techniques, including the Black-Litterman model and resampled mean-
variance optimization, can be found in Ibbotson Associates, Developing 
Robust Asset Allocations (Chicago, IL: April 2006) 

[34] Active management strategies seek to achieve specific goals and 
require more hands-on management of the fund by the investment manager 
than passively managed funds. Experience-based methods for developing 
asset allocations rely on tradition, experience, or rules of thumb and 
may be less expensive to implement than efficient frontier methods. 
Popular experience-based methods include: (1) 60/40 equity/fixed 
income as a neutral starting point, (2) allocation to fixed income 
assets increase with participants' risk aversion, (3) allocation to 
equity assets increase with time horizon, and (4) allocation to equity 
assets remain at one hundred minus the participant's age. While 
traditional finance, and modern portfolio theory in general, describes 
how markets work, some experience-based methods of asset allocation 
incorporate lessons learned from behavioral finance, a discipline that 
attempts to describe how investors actually behave. See G. Curtis, 
Modern portfolio theory and behavioral finance, The Journal of Wealth 
Management, 7(2) (2004), 16-22. 

[35] However, allocations were generally similar across asset classes, 
such as equity and fixed income. See appendix II for an additional 
discussion of the methodology and results of this work. We asked all 
eight providers in our case studies to provide example asset 
allocations for five hypothetical participant scenarios in one 
hypothetical plan. Seven of the eight providers submitted asset 
allocations for the hypothetical participant scenarios we developed 
and some providers submitted multiple allocations given varying 
assumptions and strategies. 

[36] See appendix II for an additional discussion of the methodology 
of this work. 

[37] See appendix II for an additional discussion of the methodology 
and results of this work. 

[38] We estimate that these eight providers represented over 95 
percent of the managed account industry in defined contribution plans, 
as measured by assets under management in 2013. 

[39] In conducting this work, we did not reach independent conclusions 
about whether or to what extent various entities involved in managed 
account arrangements are fiduciaries under ERISA because such 
determinations are generally based on the facts and circumstances of a 
particular situation. Instead, we report information provided by the 
entities included in our review. 

[40] However, record keepers differ in their approach to this 
arrangement. Specifically, some record keepers use an intermediary 
provider that takes on fiduciary responsibility and offers the use of 
multiple managed account providers, from which plan sponsors select a 
managed account provider to offer their plan participants. Other 
record keepers contract with only one managed account provider to 
obtain access to their managed account software, but every other 
function to support the managed account is provided by the record 
keeper. 

[41] 3(38) Investment Manager fiduciaries are required to acknowledge 
in writing that they are fiduciaries with respect to the plan, and in 
this regard, can be said to willingly accept 3(38) fiduciary status. 
See 29 U.S.C. § 1002(38)(C). 

[42] This provider requires participants to initially give affirmative 
consent that they want the provider to initially allocate and annually 
rebalance their accounts going forward. The provider automatically 
implements its annual allocations unless participants opt out of the 
service. According to representatives of the provider, this managed 
account service has not yet been used by 401(k) plan participants, but 
one record keeper has agreed to provide this service. 

[43] We did not reach any independent conclusions about whether and to 
what extent this provider is or should be a fiduciary under ERISA. 

[44] See 29 U.S.C. § 1002(21)(A)(ii) and 29 C.F.R. § 2510.3-21(c). 

[45] As noted previously, a 3(38) Investment Manager fiduciary can 
only be a bank, an insurance company, or an RIA, but there are no 
similar requirements for 3(21) Investment Adviser fiduciaries, who DOL 
officials noted could be highly qualified or have limited or no 
experience. 

[46] Plan sponsors, as named fiduciaries of 401(k) plans, are required 
to act prudently in selecting and monitoring managed account providers 
that are either 3(38) Investment Manager or 3(21) Investment Adviser 
fiduciaries. According to DOL officials, if a 3(38) Investment Manager 
fiduciary is appointed to manage plan assets, the plan trustee--who 
could be the plan sponsor or some other entity--is relieved from being 
held responsible for those assets. They further explained that, 
provided a plan sponsor trustee prudently selects and oversees a 3(38) 
Investment Manager fiduciary service provider, the sponsor cannot be 
held responsible for poor investment decisions made by the provider. 
This protection does not exist for the plan sponsor trustee if a 3(21) 
Investment Adviser fiduciary is selected. 

[47] In QDIA regulations the requirement that a managed account 
provider be a 3(38) Investment Manager fiduciary is a condition under 
which a safe harbor could be achieved by the plan sponsor. Outside of 
such a safe harbor, as would be the case with opt-in managed account 
services, there is currently no similar requirement. DOL officials 
noted that it is not clear that DOL could require 3(38) Investment 
Manager fiduciary status outside of such a safe harbor context. 

[48] According to the managed account providers in our case studies 
who offer these additional services, participants receiving asset 
allocation and savings services from managed account providers while 
they accumulate retirement assets pay the same fee as participants 
receiving spend-down services from those managed account providers. 

[49] TIPS--derived from their former name, Treasury Inflation-
Protected Securities--are inflation-indexed debt issued by the U.S. 
Treasury. These bonds have principal and coupon payments that are 
linked to movements in the Consumer Price Index. They are a defensive 
measure against expectations of inflation, which typically erodes the 
real yield of conventional bonds. Even if inflation fears are in 
check, these bonds can benefit when the yields fall on traditional 
Treasuries. These unique securities act very differently than any 
other fixed-rate bond, and their volatility can change over time, 
depending on the level of interest rates. 

[50] Although DOL has not addressed this issue, in its 2010 proposal 
on the definition of fiduciary advice, DOL requested comments on 
whether and to what extent the final regulation defining fiduciary 
investment advice should encompass recommendations related to taking a 
plan distribution, including the costs and benefits associated with 
extending the regulation to these types of recommendations. 

[51] In our previous report on IRA rollovers, we found that 
participants chose the easiest, most accessible option because they 
were often unaware of their choices or had to do additional work to 
gain advantages from the other options. GAO, 401(K) Plans: Labor and 
IRS Could Improve the Rollover Process for Participants, [hyperlink, 
http://www.gao.gov/products/GAO-13-30] (Washington D.C.: Mar. 7, 2013). 

[52] See Morningstar, Better Expected Retirement Outcomes with Managed 
Accounts (July 15, 2013). In another study of managed accounts, this 
managed account provider found that its participants who self-directed 
their 401(k) investments were either too aggressive or too 
conservative in their asset allocation strategies, and many were 
significantly underdiversified, with nearly half of the participants 
in the study having more than 30 percent of their retirement account 
improperly allocated. See Morningstar, Making the Case for Managed 
Accounts (2011). We did not verify the accuracy of the information 
provided in this report. Information provided by Morningstar is from a 
limited dataset and was used to project future outcomes only for the 
small set of Morningstar participants enrolled in its advisory 
service. These data are not representative of the future performance 
of the universe of defined contribution plan participants. 

[53] For additional information on diversification, see U.S. 
Securities and Exchange Commission, Beginners' Guide to Asset 
Allocation, Diversification, and Rebalancing, accessed on March 17, 
2014, [hyperlink, 
http://www.sec.gov/investor/pubs/assetallocation.htm]. 

[54] See Vanguard, Professionally Managed Allocations and the 
Dispersion of Participant Portfolios (Valley Forge, PA: August 2013) 
and Vanguard, Target Date Funds and the Dispersion of Participant 
Portfolios (Valley Forge, PA: November 2012). These papers examine the 
portfolio outcomes for Vanguard participants in defined contribution 
plans who enrolled in a managed account, invested in a target date 
fund or balanced fund, or self-directed their 401(k) investments from 
2007 through 2012 and from 2006 through 2011, respectively. We did not 
verify the accuracy of the information provided in these reports. 
Information provided by Vanguard is from a limited dataset that can 
only describe the portfolio performance for Vanguard defined 
contribution plan participants with these types of retirement 
portfolios over a finite period of time. These data are not 
representative of the portfolio performance of the universe of defined 
contribution plan participants or for other periods of time. 

[55] In addition, managed account providers and sponsors have reported 
that participants in managed accounts have reduced the percentage of 
company stock held in their retirement portfolios, which can help to 
reduce risk associated with investing heavily in a single equity. For 
example, one sponsor we interviewed said that the managed account it 
offers participants does not allow investments in company stock and, 
as a result, the managed account has substantially improved 
participants' portfolio diversification by decreasing investments in 
company stock by two-thirds. 

[56] See Morningstar, Better Expected Retirement Outcomes with Managed 
Accounts (July 15, 2013). We did not verify the accuracy of the 
information provided in this report. Information provided by 
Morningstar is from a limited dataset and was used to estimate savings 
and portfolio performance only for small set of Morningstar 
participants enrolled in its advisory service. These data are not 
representative of the savings or portfolio performance of the universe 
of defined contribution plan participants. 

[57] This provider presents every participant who enrolls in its 
managed accounts service with a gap analysis that shows the effect 
that even a small increase in savings can have on a participant's 
retirement income. See Morningstar, Making the Case for Managed 
Accounts (2011). 

[58] While plan sponsors can contract with their plan administrators 
or record keepers to offer these types of statements to participants 
even if they do not offer a managed account, we found that managed 
account providers consistently offered this feature to participants. 

[59] See Vanguard, Professionally Managed Allocations and the 
Dispersion of Participant Portfolios (Valley Forge, PA: August 2013). 

[60] Morningstar, Better Expected Retirement Outcomes with Managed 
Accounts (July 15, 2013). 

[61] Vanguard, Professionally Managed Allocations and the Dispersion 
of Participant Portfolios (Valley Forge, PA: August 2013). For 
additional information obtained from this report, see appendix III. 

[62] We found little available data on the performance of managed 
accounts. For the purpose of this illustration, we used Vanguard's 
published data on 5-year annualized returns for defined contribution 
plan participants with either professionally managed allocations or 
participant-constructed portfolios, which we refer to as a self-
directed 401(k) account. The 5-year returns data include portfolio 
returns from the recession of 2007-2008. Return results would likely 
be different if data from 2007-2008 were not included in the analysis. 
Information provided by Vanguard is from a limited dataset that can 
only describe the portfolio performance for Vanguard defined 
contribution plan participants with these types of retirement 
portfolios over a finite period of time. These data are not 
representative of the portfolio performance of the universe of defined 
contribution plan participants or for other periods of time. See 
Vanguard, Professionally Managed Allocations and the Dispersion of 
Participant Portfolios (Valley Forge, PA: August 2013) and Vanguard, 
Target Date Funds and the Dispersion of Participant Portfolios (Valley 
Forge, PA: November 2012). 

[63] The -0.1 percent return represents the 25TH percentile in managed 
account returns performance for the period of 2006-2011. The 2.4 
percent return represents the 75TH percentile in managed account 
returns for the period of 2007-2012. See Vanguard, Professionally 
Managed Allocations and the Dispersion of Participant Portfolios 
(Valley Forge, PA: August 2013) and Vanguard, Target Date Funds and 
the Dispersion of Participant Portfolios (Valley Forge, PA: November 
2012). 

[64] For the purpose of this illustration, we used fee data reported 
to us during our case studies of managed account providers. We also 
used Vanguard's published data on 5-year annualized returns for 
defined contribution plan participants with either professionally 
managed allocations or participant-constructed portfolios, which we 
refer to as a self-directed 401(k) account. The 5-year returns data 
include portfolio returns from the recession of 2007-2008. Return 
results would likely be different if data from 2007-2008 were not 
included in the analysis. Information provided by Vanguard is from a 
limited dataset that can only describe the portfolio performance for 
Vanguard defined contribution plan participants with these types of 
retirement portfolios over a finite period of time. These data are not 
representative of all possible fees charged to participants for a 
managed account, the portfolio performance of the universe of defined 
contribution plan participants, or for other periods of time. See 
Vanguard, Professionally Managed Allocations and the Dispersion of 
Participant Portfolios, (Valley Forge, PA; August 2013) and Vanguard, 
Target Date Funds and the Dispersion of Participant Portfolios, 
(Valley Forge, PA; November 2012). 

[65] The 2.4 percent rate of return represents the 75TH percentile for 
this record keeper's managed account participants for the period of 
2007-2012. For the same period, the 75TH percentile was 3.3 percent 
for participants with self-directed 401(k) accounts, 3.5 percent for 
participants invested in a single balanced fund, and 2.3 percent for 
participants invested in a single target date fund. See Vanguard, 
Professionally Managed Allocations and the Dispersion of Participant 
Portfolios (Valley Forge, PA: August 2013) 

[66] The -0.1 percent rate of return represents the 25TH percentile 
for this record keeper's managed account participants for the period 
of 2006-2011. For the same period, the 25TH percentile was 0.0 percent 
for participants with self-directed 401(k) accounts, 2.7 percent for 
participants invested in a single balanced fund, and 0.3 percent for 
participants invested in a single target date fund. See Vanguard, 
Target Date Funds and the Dispersion of Participant Portfolios (Valley 
Forge, PA: November 2012). 

[67] Participants with 401(k) accounts generally pay investment 
management fees and other administrative fees to providers or record 
keepers to maintain their accounts. Investment management fees, which 
can vary by investment option, are generally charged as a percentage 
of assets and indirectly charged against participants' accounts 
because they are deducted directly from investment returns. 
Administrative fees, on the other hand, can be assessed as an overall 
percentage of total plan assets regardless of participants' investment 
choices, in addition to a flat rate for some fixed services, such as 
printing plan documents. In the latter, the sponsor has the option of 
passing along some or all of the administrative fees to participants. 
We previously reported that recordkeeping and administrative fees are 
often paid by the plan sponsors, but participants bear them in a 
growing number of plans. GAO, Private Pensions: Changes Needed to 
Provide 401(k) Plan Participants and the Department of Labor Better 
Information on Fees, [hyperlink, 
http://www.gao.gov/products/GAO-07-21] (Washington, D.C.: Nov. 16, 
2006). 

[68] Participants generally receive information on the fees they pay 
to the managed account provider in their plan, but do not receive 
comparative fee information for other providers. We found few 
independent sources of comprehensive and consistent information on 
managed account fees charged by providers that a participant could use 
to compare fees across providers. PLANSPONSOR publishes an annual 
Asset Allocation Solutions Buyer's Guide that includes some 
information on the additional fees certain providers charge for 
managed accounts. However, the information on fees is not consistent 
across providers and, in some instances, does not contain information 
specific enough to allow participants to accurately identify the fee 
they will have to pay for their individual managed account. Instead, 
publicly available fee information on managed accounts can usually be 
found in specific managed account provider SEC filings or sometimes on 
provider websites, which participants may find confusing or incomplete. 

[69] In limited instances, some participants may not pay a fee at all 
because managed account providers noted that some plan sponsors 
subsidize or pay the fees charged to participants. 

[70] Revenue sharing generally refers to indirect payments made from 
one service provider to another service provider in connection with 
services provided to the plan, rather than payments made directly by 
the plan sponsor for plan services. 

[71] For example, one managed account provider may charge a one-time 
setup fee of $25,000 to cover the costs of setting up a large or 
particularly complex plan's managed account service, which may have 
primarily institutional investment options that require additional 
modeling by the managed account provider. Another provider charges 
between $6 and $14 per participant in the plan, which is generally 
paid from plan assets or absorbed into the plan's recordkeeping fees. 

[72] The hypothetical participant in our illustration is based on 
certain reported data, as described in the notes under Figure 10. 

[73] See Fiduciary Requirements for Disclosure in Participant-Directed 
Individual Account Plans, 75 Fed. Reg. 64,910 (Oct. 20, 2010) 
(codified at 29 C.F.R. pt. 2550). 

[74] This requirement is referred to as the participant-level 
disclosure regulation. 29 C.F.R. § 2550.404a-5. 

[75] 29 C.F.R. § 2550.404a-5(h)(4). 

[76] Specifically, DOL's 2012 field assistance bulletin states that 
neither an investment management service nor each individual account 
it manages should be considered a designated investment alternative, 
as described under 404a-5(h)(4). DOL also confirmed in the bulletin 
that if a plan designates a fiduciary investment manager to allocate 
the assets in a participant's individual retirement account among the 
designated investment alternatives available in the plan, neither the 
investment management service nor the individual account it manages 
would be considered a designated investment alternative and the 
disclosure requirements would be satisfied as long as the designated 
investment manager were identified under 29 C.F.R. § 2550.404a-5(c)(1) 
and the fees for such services were disclosed under 29 C.F.R. § 
2550.404a-5(c)(3). See Field Assistance Bulletin No. 2012-02R. 

[77] All participants with a 401(k) account are required to receive 
fee information from their plan sponsor in a separate disclosure. See 
29 C.F.R. § 2550.404a-5. 

[78] 29 C.F.R. § 2550.404c-5(d)(3). 

[79] Target Date Disclosure, 75 Fed. Reg. 73,987 (Nov. 30, 2010)(to be 
codified at 29 C.F.R. § 2550.404c-5). On June 3, 2014, DOL re-opened 
the comment period for these proposed amendments through July 3, 2014. 
See Target Date Disclosure, 79 Fed. Reg. 31,893 (June 3, 2014). 

[80] As previously mentioned, in its frequently asked questions for 
the 404a-5 participant disclosure regulation, DOL clarifies that 
managed account services may be considered designated investment 
managers and, as such, may not be considered designated investment 
alternatives. Because managed accounts are generally a service, some 
of the investment-related disclosure requirements in the proposed 
rule, such as information on the QDIA's investment issuer or the 
QDIA's objectives, risks, and strategies, may not apply to managed 
accounts. 

[81] However, if the managed account service is limited to the plan's 
designated investment alternatives, participants would receive the 
investment-related disclosures for all of the plan's designated 
investment alternatives, in a comparative chart format as required 
under the participant-level disclosure regulation at 29 C.F.R. § 
2550.404a-5(d). 

[82] See Fiduciary Requirements for Disclosure in Participant-Directed 
Individual Account Plans, 75 Fed. Reg. 64,910 (Oct. 20, 2010) 
(codified at 29 C.F.R. pt. 2550). 

[83] A customized benchmark is a blend of more than one broad-based 
index that reflects the mix of asset classes included in a portfolio. 
For example, for a portfolio that includes investments in stocks and 
bonds, a customized benchmark would be composed of a percentage of a 
broad based stock market performance index as well as a percentage of 
an appropriate bond index. 

[84] The provider has made a generic version of its managed account 
performance report available to the public on its website--
participants and sponsors can see how performance comparisons can be 
made using the provider's custom benchmarks and can review a 
description of the benchmarks and other key summary statistics 
provided on the report. 

[85] As previously noted, record keepers maintain recordkeeping 
systems that are used to track 401(k) plan contributions and returns. 
They may also offer managed account providers on these systems and 
play other key roles in the implementation and continued operation of 
managed accounts. For instance, they provide information to the 
managed account provider and implement asset allocation changes to 
participant accounts. Thus, for a sponsor to be able to offer a 
managed account, the sponsor's record keeper must be able to work 
effectively with the managed account provider. 

[86] Department of Labor, Employee Benefits Security Administration, 
Meeting Your Fiduciary Responsibilities (Washington, D.C.: February 
2012). 

[87] For example, a large record keeper we interviewed said that it 
began offering two managed account provider options instead of one 
because sponsors asked for more options. Similarly, in the past, 
record keepers have modified their systems to allow for greater target 
date fund choice pursuant to sponsor requests. 

[88] These sponsors had been using an advice service offered by the 
provider before they selected the provider's managed account service. 

[89] Specifically, this provider contracts with several independent 
RIAs who develop asset allocation model portfolios for participants 
based on information that the provider collects, such as information 
regarding plan investment options and any personalized information 
about participants. The provider standardizes the integration of 
operation of each investment adviser, so that a single integration 
with the provider is required, even if the sponsor later decides to 
switch to another investment adviser that contracts with the provider. 

[90] Department of Labor, Employee Benefits Security Administration, 
Target Date Retirement Funds - Tips for ERISA Plan Fiduciaries 
(Washington, D.C.: February 2013). As previously noted, target date 
funds are another professionally managed allocation that can be used 
to invest 401(k) plan participant assets and are also one of the 
categories of investments that may be eligible as a QDIA pursuant to 
DOL's regulations. 

[91] These reports can include information such as changes in 
participant savings rates and portfolio risk levels. 

[92] One of the providers that furnishes performance information is 
able to do so even though it develops 101 portfolios for each plan 
included in its managed account service prior to placing participants 
into an optimal portfolio. 

[93] DOL's service provider disclosure regulations require that some 
service providers furnish investment-related information, such as 
performance and benchmarking information concerning plan designated 
investment alternatives, that must be disclosed pursuant to the 
participant-level disclosure regulation. See 29 C.F.R. § 2550.408b-
2(c)(1)(iv)(E)(3) and 29 C.F.R. § 2550.404a-5(d)(1). 

[94] The Form ADV is the form used by investment advisers to register 
with both the Securities and Exchange Commission (SEC) and state 
securities authorities. The form consists of two parts. Part 1 
requires information about the investment adviser's business, 
ownership, clients, employees, business practices, affiliations, and 
any disciplinary events of the adviser or its employees. Part 2 
requires investment advisers to prepare narrative brochures that 
provide information such as the types of advisory services offered--
including managed accounts in 401(k) plans--the adviser's fee 
schedule, disciplinary information, and conflicts of interest. The 
brochure is the primary disclosure document that investment advisers 
provide to their clients. 

[95] 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. Thus, we excluded most record 
keepers and intermediary providers from our definition of a managed 
account provider. Similarly, even though certain other providers, such 
as target date fund 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. 

[96] See Vanguard, Professionally Managed Allocations and the 
Dispersion of Participant Portfolios (Valley Forge, PA: August 2013) 
and Vanguard, Target Date Funds and the Dispersion of Participant 
Portfolios (Valley Forge, PA: November 2012). In Vanguard's reports, 
return rates for managed accounts, target date funds, balanced funds, 
and self-directed 401(k) investments are reported at the 95th, 75th, 
50th, 25th, and 5th percentile over two different periods, 2006-2011 
and 2007-2012, respectively. 

[97] Other fee rates that we used in this scenario include 0.2 percent 
(provider reported), 0.37 percent (provider reported), 0.45 percent 
(an average of the fees we found), and 0.6 percent (provider reported). 

[98] Participant savings are a combination of the amount of salary 
saved by the participant and the employer match. 

[99] The starting account balance of $17,000 is based on the Employee 
Benefit Research Institute's (EBRI) estimated median 401(k) account 
balance at year-end 2011; the starting salary of $40,000 is based on 
the Bureau of Labor Statistics' (BLS) seasonally adjusted median 
weekly earnings for the third quarter of 2013; the average annual 
salary increase of 1.75 percent is based on BLS' salary increase 
estimate for the 12-month period ending September 2013; the savings 
rate of 9.7 percent is based on the EBRI's estimate of an average 
employee savings rate of 6.7 percent for 2012 and a standard 3 percent 
average employer match. 

[100] PLANSPONSOR is a media and research firm in the retirement 
benefits industry. According to PLANSPONSOR, it has been the nation's 
leading authority on retirement and benefits programs since 1993 and 
is dedicated to helping employers navigate the complex world of 
retirement plan design and strategy on behalf of their employees. 

[End of section] 

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