Investing May 2, 2019

U.S. Funds Are Seeing a Decline in Costs

A Morningstar study says investors are paying almost half as much to own funds in 2018, compared to 2000. 

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Morningstar, Inc. has published its annual fee study, gauging trends surrounding U.S. open-end mutual funds and exchange-traded funds (ETFs) costs.

Among study findings, the report says the asset-weighted ratio fell across U.S. funds, from 0.51% in 2017 to 0.48% in 2018—resulting in an estimated $5.5 billion in savings for fund fees.  The 6% year-over-year decline is the second largest recorded since asset-weighted fees were first tracked by Morningstar in 2000, according to the company.

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The Morningstar report credits this decline to the migration towards lower-cost funds. In 2018, they note, active funds’ fees dropped to 0.67% and passive funds’ fell to 0.15%. Additionally, active funds saw a 3.7% decline in equal-weighted average fees, and equal-weighted average fees across all share classes of active funds declined from 1.15% in 2017 to 1.11%.

This decline in fees could also be attributed to strategic-beta funds, which the report notes some asset managers have started to launch. The asset-weighted average fee for U.S. equity strategic-beta funds was 0.17% in 2018, and while the report says this number is slightly higher than traditional index funds’ fees, it is still significantly lower than fees associated with active funds.  

The study also reports that investors are paying almost half as much to own funds now, compared to 2000. Investors are contributing 40% less than what they paid a decade ago, and about 26% less than from five years ago.

“As awareness grows around the importance of minimizing investment costs, we have seen a mass migration to low-cost funds and share classes,” says Ben Johnson, Morningstar’s director of ETF and passive strategies research. “A shift in the economics of advice has further accelerated this trend. As advisers move from being paid on commission to collecting a fee for their service, a clear preference for semibundled and unbundled funds and share classes has emerged, as embedded advice and distribution costs are being stripped away from funds’ fees and charged separately.”

The study excludes money market funds and funds of funds. More findings on the study is available here.

Administration May 1, 2019

A New Way of Thinking About Retirement ‘Plans’

Mike Sasso, with Portfolio Evaluations, and a professor at Boston University, explained a new way of thinking to get plan sponsors to focus on retirement income for participants.

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Mike Sasso, partner and co-founder of Portfolio Evaluations told attendees of the 2019 Plan Sponsor Council of America’s Annual Conference that defined contribution retirement plans are not “plans.” Rather, he said, they are savings vehicles.

He said he doesn’t think a new fiduciary safe harbor for selecting annuity providers is going to open the floodgates of plan sponsors adopting annuity options in their plans. But, plan sponsors are having conversations about the purpose of their defined contribution (DC) plans, and how to help employees establish a source of retirement income. “This is one reason more plan sponsors want employees to keep their assets in the plan after retirement,” he said. He added that offering installments as a distribution option in the DC plan is a “no-brainer” for plan sponsors.

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Dr. Zvi Bodie, the Norman and Adele Barron professor of management at Boston University, told conference attendees that in order to help participants with retirement income, plan sponsors must turn their thinking to life cycle finances. Instead of looking at wealth accumulation, the gauge should be a standard of living over a lifetime.

“An income goal is different from a wealth goal,” he said. “The risk to be addressed should be the income shortfall, not returns on investments.” He added that diversification should not be the only risk management technique in DC plans. There should be hedging—eliminating the downside by eliminating the upside—and insurance—eliminating the downside for and insuring the upside for a premium.

“We want to add to Social Security inflation-protected income for participants,” Bodie said. “Annuitization with inflation protection should be the default distribution option, with the ability to opt out.”

Bodie presented 10 key design principles for DC plan sponsors:

● Set replacement income as the goal for retirement;

● Address risks relevant to the goal: income shortfall, not return volatility;

● Deliver an asset allocation strategy to manage retirement income risk;

● Make efficient use of all dedicated retirement assets;

● Offer personalization based on one’s retirement account characteristics;

● Take account of changes in both market and personal circumstances;

● Be effective even for those who are completely unengaged;

● Supply only meaningful information and offer actionable choices to improve outlook;

● Offer robust, scalable and low cost investment strategies; and

● Offer seamless transition and payout flexibility at retirement.

Bodie compared the evaluation of the income shortfall to that of evaluating funding shortfalls in defined benefit (DB) plans. A certain replacement income in order to achieve the standard of living a participant wants in retirement is the goal, and the plan should use dynamic strategies, as DB plans use liability-driven investing (LDI), to close any shortfall and achieve the replacement income goal. “LDI in a DC plan is the funded ratio of each participant’s goal,” he said.

Bodie pointed out that target-date funds (TDFs) do not take into account the short- and long-term risks of stocks. The allocation should be adjusted over time. “TDF glide paths are pre-determined no matter what happens. That’s nuts!” Brodie exclaimed. “TDFs should be more dynamic.”

Louis Belluci, associate director of U.S. equity indices at Standard & Poor’s Dow Jones Indices, told attendees he is seeing an evolution in TDFs. “When considering the goal is retirement income, more TDF managers are considering a glidepath that moves from mostly global equities to mostly global bonds ad then at retirement switches to more secure investment vehicles, such as Treasury inflation-protected securities (TIPS),” he said. “It’s more like an LDI glidepath.”

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