Data and Research

Sharp Attention Needed To Interpret Retirement Plan Fee Data

By John Manganaro editors@plansponsor.com | April 14, 2017
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Those who read a lot of retirement industry research can probably predict where the analysis moves next: “Based on a conservative analysis, it is estimated that plan participants could save on average 25 basis points per year by switching to lower cost investments that are quantitatively very similar to those they already hold, but with a better track record. Similarity is defined as a combination of category filters, together with historical and forward looking predicted-correlation based on a multi-factor model.”

With total defined contribution plan assets of $6.8 trillion (as of March 2015), RiXtrema argues the actual potential savings is at least $17 billion annually. It is not exactly easy to argue that retirement plan sponsors should not do all they can to achieve cost savings for their participants, but some readers of PLANADVISER have increasingly taken issue with this type of a conclusion.

Part of the issue is that recent examples of retirement plan fee litigation have cited this type of research as evidence that sponsors and providers are, broadly speaking, not living up to their fiduciary duties. And from a purely analytical point of view, there is the fact that these types of results, while enlightening, take full advantage of hindsight to enable the projected savings. In other words, it is one matter for dispassionate researchers to demonstrate, after the fact, that plan sponsors could have made different choices about what investments to offer, and quite another matter entirely to make investment decisions and comparisons in real time as a working plan sponsor.

RiXtrema responds to this criticism by observing that its own research approach was developed in relation to “a previous, independent study,” which indicated that menu restrictions in an average plan led to 78 basis points of additional cost relative to a low index fund basket. That study, RiXtrema admits, “could be challenged based on the argument that high fee funds held by participants should not be directly compared to low cost funds due to the unique return and correlation profile.”

RiXtrema's research objective, on the other hand, was to “find low fee replacements for high fee funds, but only where it could be proven that 1) the replacement does not materially change the risk/return profile offered to participants in their current menu and 2) that the track record of that fund is actually better on a ten- year basis, than the track record of the incumbent fund.”

“Our study overcomes the difficulty by making sure that the low fee alternatives are chosen to resemble the active fund being replaced,” RiXtrema says, “both qualitatively in terms of fund category and quantitatively in terms of past and holdings based behavior.”

Whether or not one accepts this picture, it must also be admitted that the overall quality and long-term net performance of funds is paramount to consider as plan sponsors and participants make their decisions in real time. Fees are crucial, clearly, but they are only one element of a spectrum of considerations made by plan sponsors in the management of the investment menu, and indeed of the whole plan.  

NEXT: Fee research obscuring value of active investing? 

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