The Markets July 29, 2014

GAO Questions Advantages of Managed Accounts

A lack of information and consistent standards makes it difficult for 401(k) plan sponsors to gauge whether managed account services truly benefit participants, says a new report.
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In the report, “401(k) Plans: Improvements Can Be Made to Better Protect Participants in Managed Accounts,” the U.S. Government Accountability Office (GAO) says because little is known about whether managed accounts are advantageous for 401(k) plan participants, and whether plan sponsors understand their own role and potential risks, it was asked to review and answer these questions.

The GAO examined how the relevant service providers structure managed accounts, the advantages and disadvantages of these accounts for participants, and the challenges plan sponsors face in selecting and overseeing such providers.

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After reviewing eight managed account providers in 2013, who represented about 95% of the industry involved in defined contribution plans, the GAO found that these providers varied in how they structured managed accounts, including the services they offered and their reported fiduciary roles. The GAO found the issues with fiduciary roles could potentially provide less liability protection for plan sponsors for the consequences of the provider’s choices.

The report also notes that while participants in managed accounts received improved diversification and savings rates, this was offset by fees for such accounts varying widely over the long term and thus lowering accounts balances. The GAO also found participants generally do not receive performance and benchmarking information for their managed accounts.

Similarly, the GAO says plan sponsors are challenged by insufficient guidance and inconsistent performance information when selecting and overseeing managed account providers. Without better guidance, it notes, plan sponsors may be unable to select a provider that offers an effective service for a reasonable fee.

The report recommends that the Department of Labor (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. The DOL agreed with these recommendations and says it will consider changes to regulations and guidance to address any issues.

Highlights of the report can be found here. The full report can be found here.

The Markets July 29, 2014

For Many, IRA Withdrawals Are Well-Controlled

Most savers are withdrawing from individual retirement accounts (IRAs) at a rate likely sustain some level of monthly income throughout retirement, according to an EBRI analysis.
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The new research from the Employee Benefit Research Institute (EBRI) finds that in accounts tracked by the EBRI IRA database, just under 21% of traditional and Roth IRA accounts showed a withdrawal in 2012. However, the overall IRA withdrawal percentage was largely driven by activity among traditional IRAs owned by individuals ages 70 ½ or older, EBRI says, a point at which the individuals are required by federal law to take distributions from their accounts.

For those at or above the required minimum distribution age, EBRI’s research shows the median withdrawal rate is close to the amount that is required to be withdrawn by law. Some accounts, however, showed significantly more in withdrawals. In contrast, among individuals under age 60, just 10% or fewer had a withdrawal in 2012, according to EBRI.

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Looking at withdrawal patterns over the 2010 to 2012 period, the EBRI analysis suggests that the initial withdrawal rate for those in the 70 or older age group appears to be at a level that these individuals are likely to continue to take. The analysis found that among those at the age for required distributions who elected to take a withdrawal in all three years of the sample period, the median withdrawal rate was 5.1%.

“While the median withdrawal rates are encouraging in that they suggest that many individuals would be able to maintain the IRA as an ongoing source of income throughout retirement, further study is needed to see if these individuals are maintaining those withdrawal rates over longer periods of time,” notes Craig Copeland, EBRI senior research associate and author of the report.

Additionally, Copeland says the integration of the EBRI IRA data with data from employment-based defined contribution retirement accounts will allow for a better picture of what individuals who may have multiple retirement accounts do as they age through retirement. Such a research effort is currently underway as part of an initiative associated with EBRI’s Center for Research on Retirement Income (CRI), he adds.

As the EBRI report notes, a substantial portion of IRA assets originate in other tax-qualified retirement plans, such as defined benefit pension plans or and 401(k) plans, and are moved to IRAs through rollovers at job change (see “For IRAs, It’s All About the Rollover”). Thus, in many cases, IRAs are not only independent retirement savings vehicles, but repositories for assets built up in the employment-based retirement system, EBRI says.

The EBRI IRA Database is an ongoing project that collects data from multiple IRA plan administrators. The data for 2012 contains information on 25.3 million accounts owned by 19.9 million unique individuals, with total assets of $2.09 trillion. In this study, only withdrawals by individuals owning either traditional or Roth IRAs in the database are examined, a total of 17.7 million individuals with $1.97 trillion in assets.

Other findings in the new EBRI analysis include:

  • Fewer than 21% of all traditional and Roth IRA accounts together had a withdrawal in 2012, including 24.3% of traditional accounts and 3.6% of Roth accounts.
  • By age, 65.4% of the individuals taking a withdrawal were ages 65 or older, and just over half (51.1%) were ages 71 or older. At the same time, just 11.5% were younger than age 50. For traditional IRA owners taking a withdrawal, the age distribution followed the overall age distribution, with 67.6% ages 65 or older and 53.1% ages 71 or older.
  • In contrast, among Roth IRA owners who took a withdrawal, 44.0% were younger than age 50 and only 9.8% were ages 71 or older. Among Roth owners who took a withdrawal, 35.6% had a balance of less than $10,000.

Copeland notes that, while withdrawals by individuals younger than traditional retirement age do occur, they are generally thought to be the result of the need for money either because of hardships or due to insufficient funds held elsewhere to finance major purchases—this despite the fact that the resulting tax and premature withdrawal penalties imposed are significant.

The full report, "IRA Withdrawals in 2012 and Longitudinal Results, 2010–2012," is published in the July EBRI Notes, online at www.ebri.org.

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