Benefits November 8, 2004

Fees Only Middle-of-the-Road Concern when Choosing Managers

November 8, 2004 (PLANSPONSOR.com) - A recent survey shows that fund sponsors rank management fees as only in the middle of a priority list when conducting due diligence on investment managers.
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Fees only become prominent when fund sponsors advance in their selection process, often becoming a point of contention after management hiring occurs, the 2004 Investment Management Fee Survey, conducted by Callan Associates, asserted. Fund sponsors negotiate such fees with two-thirds of their managers, according to a Callan press release. Unlike four years ago, when a similar survey was conducted, all types of funds – corporate, endowment/foundation, multi-employer and public – attempt such negotiations.

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The survey also tells the story of other interesting trends regarding fees in the investment world. On the issue of fee payment, one-third of respondent reported that they calculate fees based on an average of month-end values. The remaining respondents reported that they calculate fees based on values at the end of each quarter.

The use of performance fees seem to be on the rise, as well. Sixty percent of investment managers and 30% of fund sponsors claim that they use performance fees, compared with only 37% and 12% in 2000. Published fee schedules show that the percentage paid to performance fees is on the rise, according to the survey.

The fees paid however, may not be as exorbitant when the breakdown of costs is considered for investment managers. Fifty percent of fees collected are used to cover the base costs of the investment manager, while less than one quarter is used for bonuses. The remaining money, somewhere between one-third and one-quarter, can be claimed as profit.

Comparing fees to those noted in 2000, Callan found that the gap between published and actual fees for many asset classes has widened. Published fees have risen by 10%-20% on average, while actual fees have declined by approximately 5%. Factors that affect this gap are where the product falls on the capital market line, the maturity of the asset class, and the supply and demand forces in existence, according to Callan.

Fund sponsors noted that one of the biggest issues regarding fees was the value added to their portfolio by the body receiving the fees. Other issues noted were the use of most favored nations clauses, manager focus on the portfolio versus the bottom line, and fee transparency. On the other end, investment managers noted that their biggest issues were margin pressure, expanding distribution channels, performance-based fees ability to fund a long term business, and the use of most favored nation’s clauses.

The survey, which reports on fee payment practices, uses, and trends for US institutional investors, incorporated responses from 166 fund sponsors and 134 investment managers.

Administration November 7, 2004

EBRI: Plan Participation Among Families Is Up

July 23, 2003 (PLANSPONSOR.com) - More than four out of 10 families had a participant in an employment-based retirement plan in 2001, a level virtually unchanged from 1998's figures.
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The figures from 2001 might not indicate much of a shift in the previous three years, but going back to 1992, headway is being made on increasing participation levels.   Where in 2001, 41.6% of families were represented by participation in either a defined benefit or defined contribution plan, in 1992, this same figure was only 38.8%, according to a release of data on the Survey of Consumer Finances by the Employee Benefit Research Institute (EBRI).

In fact, the percentage of families participating only in a defined contribution plan rose to 57.7% in 2001, from 37.5% in 1992.   Conversely, only 19.5% of families had only a defined benefit plan in 2001.

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Additionally, the recent results showed 31.4% of families owned either an individual retirement account (IRA) or a Keogh plan, an increase from 28.4% in 1998 and 26.1% in 1992. Furthermore, more than half (58.6%) of families had a participant in a current or previous employer’s retirement plan or an IRA/Keogh, which is an increase from the 53.3% in 1992.

Contributions Levels

Looking at the defined contribution plan, plan balances are also on the rise – albeit the data only includes 2001’s figures, which missed a year of market declines in 2002.   Among all families with a defined contribution plan in 2001, the median plan balance was $18,000, an 81.8% increase from the 1992’s figures and a 10.2% rise since 1998. Similarly, among families with an IRA/Keogh plan, the median value of their plan was $27,000 in 2001, up 24% from 1998.

Outside of the employer-sponsored retirement plan, EBRI’s study also examined IRA holdings among families.   Not surprisingly, the most commonly owned IRA was the regular IRA, owned by 42.2% of family heads. This was followed by:

  • Rollover IRA held by 25.7%
  • Roth IRA owned by 16.4%.

However, when broken down by assets, family heads with rollover-IRAs-only moved to the top spot, accounting for 36.0% of the total assets, while the owners of regular-IRAs-only accounted for 31.3% of the assets.

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