Retirement Plans Driving Wider R6 Share Offerings

A recent Cerulli Associates survey finds investment firms expect to see the biggest increase in use of I-shares, R6-shares, and “platform/wrap share classes.”

According to the latest issues of The Cerulli Edge U.S. Monthly Product Trends Edition, mutual funds endured outflows of $9.8 billion during July, marking the second straight month of outflows. Despite that, Cerulli data shows capital market performance was strong enough to propel asset growth to 2.5%, ending the month at $12.5 trillion.

“After tepid growth in May and June, ETF assets jumped 5.5% in July, to finish the month at $2.36 trillion,” Cerulli explains. “While global market performance was a key driver, massive July flows of $45.9 billion were also a contributor.”

One clear overall theme continuing this year has been the shift in assets to lower-cost share class offerings. Firms expect to see the biggest increase in use of I-shares, R6-shares, and/or a platform/wrap share class—64%, 55%, and 50%, respectively. Additionally, financial advisers report that while 23% of their 2015 practice sales came in A-shares, they expect to substantially increase their use of platform and institutional share classes this year and beyond.

“Amid a persisting trend toward lower cost and more transparent share classes, as well as the recent Department of Labor (DOL) Conflict of Interest Rule, the R6 share, which typically has no revenue sharing (e.g., 12b-1 fee, sub-TA fee), has witnessed significant asset growth,” Cerulli says. “Moreover, the low-cost and transparent attributes of the share class resonates with DC plan sponsors to the point that 64% of asset managers view large DC plans as the most popular channel for the R6-share class.”

NEXT: A positive trend for individual investors, too 

According to Cerulli, the industry’s focus on low-cost pricing, “demand from intermediaries for the lowest priced share class, retirement plan sponsors’ efforts to offer lower costs, the Department of Labor Conflict of Interest Rule, and now the SEC’s 2016 share class initiative should all be enough reason for firms to scrutinize their share class offerings.”

“Firms continue to offer an alphabet soup of share classes, but assets have shifted to lower-cost offerings,” Cerulli finds. “According to Morningstar, institutional share classes represented 31% of assets at the end of 2Q 2016, up from 16% in 2006. Conversely, A-shares made up 16% of assets at the end of 2Q 2016, down from 28% in 2006.”

Cerulli suggests this phenomenon is confirmed through net flow trends and the firm’s 2016 proprietary Economics of Product Development and Pricing Survey, in which asset managers report that I-shares made up an average of 49% of gross sales over the last 12 months.

Looking deeper at net flows the picture grows even clearer: “Institutional and retirement share classes brought in positive net flows in 2015 and June 2016, $143.5 billion and $125.1 billion, respectively, while A-shares had outflows of $91.3 billion and $68.9 billion for the same time frames. Cerulli continues to believe that core share classes will prevail—a lean institutional share class, a non-12b-1 share class for platforms and wraps, a classic 25-basis-point share class, and a bare-bones retirement share class exclusive of a servicing fee (sub-accounting transfer agency fee).”

More information on obtaining Cerulli research is available here.