Data and Research

Investment Manager and Recordkeeper Changes Driven by Fees

The desire to reduce fees is the top reason DC plan sponsors cite for contemplating changes in investment managers and recordkeepers, a study finds.

By Rebecca Moore | July 26, 2017
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Plan sponsors’ desire to reduce plan costs is substantially impacting their approach to investment menu design and their relationships with defined contribution (DC) plan investment managers, according to findings from Retirement Planscape, an annual Cogent Reports study by Market Strategies International.

Overall, 7% of plan sponsors intend to add at least one manager to their investment lineup in the next year. At the same time, 2% plan to drop a manager and 16% intend to do a combination of adding and dropping managers.

Linda York, senior vice president of Cogent Reports, a division of Market Strategies International, in Cambridge Massachusetts, tells PLANSPONSOR a new question was added this year about whether plan sponsors will continue to use existing firms for new mandates or award new business to new asset managers. “Our theory was plan sponsors are looking to award new business to managers they are already working with to add more investment options to strengthen bargaining power, rather than to be a small client to several firms,” she says, noting that the findings validated the theory.

Twenty-nine percent of plan sponsors intend to award new business to existing firms, while only 15% plan to pull business away—evidence that plan sponsors are concentrating their assets with the smaller number of managers they know, making sure they have the best bargaining power for lower fees and lower share classes.

According to a blog post written by York, in instances where plan sponsors say they intend to drop or reduce the number of investment options provided by specific investment managers, the desire to reduce fees/expenses (32%) outranks underperformance (26%) as the most common reason for the second year in a row. Large to mega plan sponsors are more likely than their peers with smaller plans to drop a manager due to asset class risk attributes no longer meeting requirements (26%) or to switch from an active manager to a passive manager (22%). In addition, this year there was a significant increase in the percentage of plan sponsors who would drop an investment manager because of negative media perception, driven by respondents in the micro plan segment (12%).

York explains that a companion study, Cutting Through the Institutional Marketing Clutter, found the majority of plan sponsors overseeing the investment menus in their 401(k) plans neither actively engage with nor actively seek information about investment managers on a regular basis. York says plan sponsors are largely looking to plan advisers and consultants rather than looking into investment managers on their own. Most likely, they have so many other job responsibilities, unless there is a performance issue, they wouldn’t initiate a review, she adds.

“We do know in larger segments of the DC plan market there is usually an investment policy statement (IPS) which requires specific review on a regular basis,” York says.

NEXT: Provider changes also tied to expenses and investments