Alaska retirement board recommends closure of widely used plan after analysis finds flaws

The board in charge of Alaska’s retirement system for public employees has recommended the closure of its commonly used managed accounts program after an independent review found workers were being charged high fees and receiving lower-than-expected returns.

Managed accounts cover more than 10,000 of the 122,000-plus accounts in Alaska’s state employee retirement system and were the default option when the state switched from a pension-style retirement system to its current 401(k)-like approach in 2006.

Many of those employees are only now discovering that they’ve been in a managed account program.

“I’m feeling a little duped,” said Susan Ritter, an Anchorage School District teacher since 2007. Until recently, she had been unknowingly using a managed account.

“Here I am, wondering if I have to work an extra couple of years to catch up,” she said.

Public employee unions, which have advocated a return to a pension-style retirement system instead of the state’s current 401(k)-like approach, are citing the board’s decision as further evidence that the current system is inadequate.

“Our retirement system is not working. It is not truly providing a retirement for state employees, for public employees,” said Heidi Drygas, executive director of the Alaska State Employees Association.

The problem flagged by the board is with the Managed Account Service operated by Empower, the nation’s second-largest retirement plan provider.

What’s different about managed accounts

Most of Alaska’s available retirement accounts are so-called “target date” funds. Employees put money into a fund that buys a balanced mix of stocks, bonds and other investments, then ride the ups and downs of the financial markets until their retirement date, when they begin withdrawing money.

Managed accounts are designed for people who want to actively, rather than passively, direct their investments. An employee is supposed to provide a variety of financial information to Empower, then make regular decisions on investments with the help of a specialist.

“When you’re comparing a managed account to a mutual fund, that’s like an apples-to-oranges comparison,” said Stephen Gawlik, a spokesperson for Empower.

Under one hypothetical scenario outlined in the board’s third-party analysis, someone who had $150,000 invested at age 55 would have $356,647 at age 65 if invested in a target date fund of 2025. Someone in a managed account program would have $319,211 at age 65 — 10% less than the alternative.

“We believe it’s an error for the Alaska retirement board to focus only on the returns,” Gawlik said.

Empower’s managed account system invites participants to provide information on other retirement accounts, pensions, data about their spouse and their health, and set a preferred retirement age so an expert can provide specific advice and financial management.

Excluding the value of that management is “a disservice to the plan participants who actually need advice,” Gawlik said.

But the analysis found almost 70% of employees participating in the managed account program weren’t using any of the active management functions. In many cases, participants only considered adjusting their expected retirement date.

As a result, participants ended up paying higher fees for services they weren’t actively using.

The third-party analysis also found that even if a participant adjusted their retirement date and supplied other information, the managed accounts tended to perform worse than a target-date account.

Many employees were unknowingly chosen by default

A decades-old decision by the state of Alaska appears to have contributed to the issue. From 2006 through 2009 or 2010 — records are unclear — the state’s default choice for new employees was a managed account program. At the time, it was run by Great-West, one of three companies that later became Empower.

In a 2009 retirement board meeting, members of the board acknowledged that Great-West would be charging higher fees for the program, but according to the minutes of the meeting, they ultimately concluded, “In the grand scheme of things, this additional cost is acceptable, given that the board is providing participants more flexibility in choosing investment options.”

But because they were placed into a managed account by default, many employees enrolled in the program didn’t know they needed to take additional steps.

That appears to have compounded problems for many employees. The managed account system is designed around a “funding ratio” based on retirement age and the amount saved in the account. If someone has less than required by the ratio, the system constrains their investment options, reducing returns.

The third-party analysis found that feature may have been triggered more frequently among older employees.

“I’m making a stink because I feel stolen from,” said Service High School teacher Dan Maclean.

He joined the Anchorage School District in 2007 and was among the state employees who were automatically enrolled in the managed accounts program.

He found out in 2020, when he was paging through retirement documents during the COVID-19 lockdown. After he noticed the fees he was paying, he started asking other teachers about their accounts.

“I was like, ‘Oh my gosh, tons and tons of people don’t even realize that they’re enrolled in this program,’” he said.

He joined his union’s retirement committee and began advocating for a change. The retirement management board began investigating the issue in 2022, resulting in the release of the third-party report this year and the recommendation to close the program to new entries.

NEA-Alaska, Maclean’s union, sent out a warning message to all members soon after the retirement board issued its recommendation on Oct. 12.

“This is a dishonest program. It’s not clear you’re enrolled in it,” Maclean said. “There are over 10,000 of these accounts, and Empower was aware that people were not using these accounts in the way they were intended to be used.”

Maclean said he’s more broadly frustrated by the state’s retirement system for teachers overall. Teachers aren’t eligible for Social Security here, so it’s a mistake to think of the current system as like a 401(k) intended to supplement federal payments, he said.

“There’s no secret,” said Susan Ritter, the Anchorage School District teacher who recently discovered she was in the managed account program. “You can’t retire in Alaska. You really aren’t set up to retire.”

Gawlik said Empower had more than 5,000 in-person or phone meetings with Alaska retirement plan participants last year, and that satisfaction rates, as judged by surveys, were above 94%.

“The Empower managed accounts program is designed to help individuals with their own personalized goals and financial priorities. There is no single intended use. The managed accounts experience is as robust as individuals want to make it,” he said by email.

He said the company will continue to talk with state officials about the issue, and retirement counselors are available to talk to “any individual who wishes to learn more about Empower’s managed account program in Alaska.”

A spokesperson for the Alaska Department of Administration was unable to say whether that agency has already implemented the retirement board’s recommendation.

Ritter is pessimistic about what happens next.

“People like me will suck it up,” she said. “Young teachers will leave, and legislators will wring their hands. It’s so frustrating.”

[Correction: Empower spokesperson Stephen Gawlik’s name was misspelled in the original version of this article.]

Originally published by the Alaska Beacon, an independent, nonpartisan news organization that covers Alaska state government.