Managed accounts can be a “powerful tool” for plan participants, but fees threaten their value.

That’s according to a Towers Watson paper that looks at the advantages and disadvantages of managed accounts as a qualified default investment alternative (QDIA).

While there are some very helpful aspects of managed accounts—one of the three options allowed as defaults by the Department of Labor if plan participants fail to choose investments—a Towers Watson survey found that just 3 percent of plan sponsors use them. Those that do seem pleased with the results, as borne out by a session at the Plan Sponsor Council of America meeting last fall.

But while they do offer the potential for higher savings rates and higher returns for participants, in a report issued last summer by the Government Accounting Office, the GAO was not as impressed, citing, among other things, high fees that can actually eat up those higher returns.

Although the GAO said participants in managed accounts can expect “improved diversification and experience higher savings rates compared to those not enrolled in the service,” that didn’t change the fact that “these advantages can be offset by paying additional fees over time.”

Other concerns by the GAO were limited fee disclosures to participants, limited disclosures to plan providers, a lack of adequate benchmarking, and the ability to limit fiduciary responsibility.

The Department of Labor, for its part, said that it agreed with the recommendations the GAO made based on its evaluation.

The Towers report came to much the same conclusion, saying that managed accounts need to provide “complete financial information at a reasonable cost” in order to provide any real advantage to participants.

Although the paper acknowledges that the additional services provided in managed accounts carry additional costs, it also said that high costs are standing in the way of broader adoption of managed accounts as QDIAs and that the industry will have to respond before sponsors or participants choose them en masse.

In addition, the paper said that the extent to which managed accounts can benefit participants may depend on participants’ “level of engagement and ability to increase their savings.” As a result, better protections for participants need to be put in place so that those participants can actually reach their retirement goals.

Towers also offered suggestions on how to make managed accounts more attractive, such as transitioning young participants into managed accounts as they age and their financial situations become more complex.

In addition, investment strategies that are more in line with those used in defined benefit plans and outside the core investment lineup could provide better returns “if investments are implemented through a managed account that allows for more efficient participant portfolios.”

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