Data and Research July 26, 2017

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.
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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.

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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

The Retirement Planscape study also found only 15% of DC plan sponsors are contemplating looking for a new plan recordkeeper in the next 12 months. York says the top three reasons are plan investment fees, plan administration fees, and the quality of investment options.

According to the report, 15% of plan sponsors ranked plan investment fees as the No. 1 reason for contemplating a move to a new provider, while 32% include that reason in the top three. Plan administration fees was chosen as the No. 1 reason by 13% of respondents, and was a top three choice for 32%. Quality of investment options was ranked No. 1 by 9%, while 30% included this in their top three.

Overall service quality for plan sponsors was cited as the No. 1 reason for 9% of plan sponsors and in the top three for 22%. Overall service quality for plan participants was No. 1 for 5% and in the top three for 22%.

The research found that, when considering plan providers, the micro plan sponsors look for value and companies they trust while small to medium plans seek superior choice and flexibility with investment options. Meanwhile, large and mega plans hone in on best-in-class participant service and support.

Interestingly, according to the study, plan sponsors are turning from the big name providers to the lesser used. “The provider market has been dominated by two players for years. They are good at targeting specific segments of the market and good at working with advisers,” York says. “Now we are seeing firms not as well-known in the larger end of market offering services or marketing services that sponsors need and picking the target market segment they feel they’re best suited to serve.” She notes that these providers realize they can’t be all things to all people, so they are working with the advisers they need or investing in technology and infrastructure to make an impression on larger plans.

“Dominating providers have competition with providers who can claim expertise in a particular segment,” York concludes.

An online survey of a representative cross section of 1,422 401(k) plan sponsors across micro (less than $5 million in assets), small to mid ($5 million to less than $100 million in assets), and large to mega ($100 million or more in assets) plans was conducted from March 22 to April 17, 2017. Plan sponsor survey respondents were required to have shared or sole responsibility for plan design, administration or selection and evaluation of plan providers, or for evaluating and/or selecting investment managers/investment options for 401(k) plans.

Information about other findings in, and how to purchase, the latest Retirement Planscape report is at http://landing.marketstrategies.com/retirement-planscape-2017.

Data and Research July 25, 2017

DC Plan Sponsors Feel Responsible for Retirement Readiness

Sixty-one percent of employers now analyze the percentage of their employees on track to replace 80% or more of their final salary in retirement, up from 44% in 2013, according to J.P. Morgan.
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Defined contribution plan sponsors are beginning to understand the importance of running their plans in a robust manner to get people prepared to retire with adequate income, J.P. Morgan says in a new report, “Progress Never Stops: How plan sponsors are sharpening their focus to strengthen plans and improve outcomes.”

When DC plans were first introduced 30 years ago, J.P. Morgan says, sponsors simply viewed them as vehicles to attract and retain workers. Today, plan sponsors increasingly feel responsible for getting their workers retirement ready, the investment firm says.

According to the report, 85% of large plans and 65% of plans overall automatically enroll their workers into the plan. Seventy-seven percent of large plans automatically escalate deferral rates. This is 50% among plans of all sizes. Eighty percent of large plans offer target-date funds (TDFs) on their investment menus; this is 62% among all plans. Ninety-three percent of large plans with qualified default investment alternatives (QDIAs) use TDFs as the QDIA, and 78% of all plans with QDIAs use TDFs as the QDIA. However, only 20% of large plans conduct re-enrollments, and a mere 13% of plans of all sizes do so.

Eighty-two percent of sponsors today say they feel a “very high” or “somewhat high” sense of responsibility for their employees’ financial wellness, up from 59% in 2013. Today, 82% of employers view their retirement plan as a tool to ensure employees have a financially secure retirement, up from 77% in 2013. Furthermore, 61% of employers now analyze the percentage of their employees on track to replace 80% or more of their final salary in retirement, up from 44% in 2013. In addition, 23% of employers say that getting the maximum number of participants to retire with adequate income is important, more than double than the percentage who said so in 2013.

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NEXT: Areas for Improvement

J.P. Morgan says there are areas where plan sponsors can improve their plans. While 54% of sponsors believe their participants should be saving 10% of their salary or more, only 23% say their average savings rate is at that level. Only 56% of sponsors are confident their participants have invested their assets appropriately, and only 43% of sponsors know that they are a fiduciary.

“Automatic features, if not carefully implemented, may have unintended consequences,” J.P. Morgan says. “Automatically enrolling participants at too low a contribution rate, especially if not coupled with an appropriate automatic contribution escalation schedule, could result in undesirable retirement outcomes. Automatic contribution escalation schedules that increase too slowly or are capped at too low a rate may lead some participants to assume they are saving adequately when they are not.”

J.P. Morgan found that 31% of employers automatically defer workers’ contributions at 3%, and 65% use a deferral rate of 6% or less. J.P. Morgan concludes by saying that further improvements to DC plans are necessary.

The “Progress Never Stops” report can be downloaded here.

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