Data and Research

Sharp Attention Needed To Interpret Retirement Plan Fee Data

By John Manganaro | April 14, 2017
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One of the clearest ways expanded fee data is impacting the way retirement plan sponsors and participants go about picking investment options has to do with the perennial “active versus passive debate.” In short, sponsors and participants have clearly shifted in the passive direction as more fee information has become available. 

Whether this is a good thing will take some time to pan out. A recent Natixis Global Asset Management survey, in the meantime, warns that many investors have expectations that “don’t reflect a full understanding of the risks of low-cost index funds versus the potential benefits of more expensive active management.”

In a nutshell, providers are concerned that a laser focus on lower fees will wholly obscure the additional value potentially delivered by active management. It is true that active management often fails to outperform its respective benchmark over the long term, but this does not mean there are not any prudent active investment funds that would serve plan populations well.  

Other ways knowledge around investing fees and structures falls short include that more than three-quarters of investors agree that index funds and exchange-traded funds are usually a cheaper way to invest compared with active equity mutual funds, but the same number also believes they are less risky as a category. In reality, advisers will know, the simple labels of “index fund” or “exchange-traded” tell one essentially nothing about the underlying investment risk or strategy. According to Natixis, 64% of investors “think using index funds will help minimize investment losses.”

Similarly, nearly seven in 10 investors “believe index funds offer better diversification” compared with active management, and nearly the same number (61%) believe index funds “provide access to the best investment opportunities in the market.”

Natixis finds many investors who were expecting lower risk via low-cost indexed investments “were surprised at the start of 2016 when the Standard & Poor’s 500 had its worst opening since 1928.” The index bottomed out on February 11, having fallen 10.5% since trading began in January, Natixis explains. “The market did rebound, finishing the quarter 0.7% ahead, but tracking the index would have resulted in a hair-raising ride. And while the first quarter might be seen as an anomaly, volatility in markets is not.”

Taking this all together, Natixis urges financial services providers to ensure their clients understand up front what the real definitive characteristics of “active versus passive” actually are—and that investment fee statistics only tell part of the story.