PLANADVISER - Winter 2023 - 36

Compliance Analysis
Managed Account Services
What advisers need to know
AS 401(k) plan sponsors explore ways to provide participants
with more services and better outcomes, adviser
managed account services are increasingly gaining attention.
These are customized investment management
services for participant plan accounts. This article focuses
on managed account services that a plan sponsor designates
as an available investment service for participants.
Here are some key points that advisers should keep in mind.
ERISA Considerations
In providing investment management services for a
participant's account, the adviser is a fiduciary under the
Employee Retirement Income Security Act and an ERISA
Section 3(38) investment manager with respect to the
account assets; he also must provide an ERISA 408(b)(2)
disclosure to the plan sponsor.
As a fiduciary, the adviser must adhere to the duties of
prudence and loyalty in managing the participant account
assets. This means he should undertake a diligent process
to obtain information about the participant-such as the
person's investment objectives, risk tolerance and financial
needs-and then use that information to develop and implement
an investment strategy that aligns with those variables.
It is a good best practice for the adviser to document the
process supporting the investment decisions. He should
also ensure that the compensation for the managed account
service is reasonable relative to the services provided.
Besides these ERISA considerations, advisers should be
aware of the Securities and Exchange Commission's guidance
on reverse churning and should therefore actively
manage the participant accounts. At least one lawsuit has
already been filed alleging reverse churning violations.
The Services
The principal service offered in a managed account is
customized discretionary portfolio management. There is
a growing trend to offer additional valuable services-e.g.,
projections on retirement readiness, savings rate guidance,
Social Security retirement benefit guidance, and retirement
distribution planning. These additional services
should be considered in evaluating the reasonableness of
the adviser's compensation.
Plan Design
There are two ways for a managed account service to be
offered in a 401(k) retirement plan-opt-in and opt-out.
With an opt-in plan design, the managed account service
is available for all participants to elect. With an opt-out
plan design, managed accounts are the plan's qualified
default investment alternative, meaning that participants
who fail to make an election are defaulted into a managed
account. The participant may then opt out and elect other
plan investments.
The opt-out plan design may be structured as a
" dynamic " QDIA-i.e., a QDIA that uses a target-date fund
as the initial default until a specified age, such as 45 or 50,
and then the plan transitions the QDIA from the TDF to a
managed account. Incidentally, a plan may offer both opt-in
36 planadviser.com | Winter 2023 | Plan Management Art by Aya Kakeda
http://www.planadviser.com
PLANADVISER - Winter 2023

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