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SMAs Face 401(k) Barriers
Getting separately managed accounts into 401(k) plans will take some technological changes, clarity from regulators about the limits of fiduciary responsibility and changes in fees, industry participants say.
Dan Maurer, senior v.p. of marketing at Curian Capital, said the reason is that plans cannot yet offer fractional shares of securities that would allow for the proper distribution of funds when participants cash out. That technology would in turn offer a way to get larger balances that would make managing a 401(k)-based SMA worthwhile. "I think it will be available in three to five years," he said. After that, the issue will be educating participants, he said. Curian, Maurer added, has been looking at how to get SMAs into 401(k)s, but has not made doing that a priority yet.
Randy Bullard, executive v.p. at Placemark Investments, said the fiduciary responsibility issue comes up when dealing with overlay managers, who work with the manager of the SMA. The overlay manager coordinates the trading done within the account, but other managers might actually execute the trades and sometimes the trader will be allowed to execute without signing off with the overlay manager. "You get a blurring of who is responsible," Bullard said. As to who counts as a fiduciary in this situation, he said, "That's a good question... We're just going to have to figure that out." Until there is some clear word from the Department of Labor, that may become necessary if SMAs expand into ERISA-governed plans.
At Parametric Portfolio Associates, Steve Kauffman, director of overlay management, said that fees are an obstacle to SMAs entering the 401(k) market. He noted that a large part of the SMA business--about $1 billion out of $2.5 billion--is from the rollovers out of 401(k)s and into IRAs. That's because the 401(k) by that time has enough assets to make managing an SMA worth it. Until someone finds a way for advisors to make money from smaller accounts, SMAs contact with the 401(k) world could be limited to that market. "Taking an asset-based fee... $16,000 times 25 basis points, you're not making anything," he said.