Plan Sponsors Look to Change Up Investment Menu

Mutual funds, passive funds especially popular

Plan sponsors are re-evaluating their investment lineups over the next 12 months, according to the DC Investment Manager Brandscape report by Cogent Research.

Cogent presented findings from the report Tuesday in a webinar. The survey was conducted online in March and April among 600 401(k) plan sponsors.

Among the “intriguing” findings, according to Linda York, vice president of the syndicated division at Cogent and lead author of the report, is the change expected for next year. “We found that plan sponsors anticipate considerable activity in terms of DC investment changes in the coming year,” she said. More than half said they were making changes in the next 12 months, “a substantial increase compared to just one year ago.”

Furthermore, 10% of plan sponsors said re-evaluating their investment menu was their top priority for the next 12 months, and more than a third said it was in their top three priorities. “Notably, 45% also cited concerns over reducing plan costs as a key priority,” York said.

“With all this attention being paid to plan investments and increased activity anticipated in terms of changes, it’s really critical for asset managers to match the right product and investment objective to each segment’s needs,” York said.

From a product perspective, “mutual funds are clearly the product of choice among DC plan sponsors, and most of the anticipated activity will occur in this product category.” Thirteen percent of sponsors said they would add traditional mutual funds to their lineup over the next 12 months, and 9% said they would add indexed mutual funds. “Passive funds actually rival active funds in terms of their future growth potential,” York noted.

Nearly 40% of plan sponsors said helping their plan participants reach their retirement goals was a priority, the report found. “It follows that products design to provide retirement income are on the radar screen for many,” York said. Over a quarter of respondents already offer such products, and 35% are interested in exploring options.

According to the 2012 study, 36% of plan sponsors automatically enroll participants into a default investment, most commonly a target-date fund, York said. “Given the popularity of these options, a competitive target-date fund offering is essential for asset managers who want to garner more DC assets.”

Most sponsors use the proprietary TDF from their provider, but the report found about a quarter are using a custom option. Twenty-nine percent of small firms use a custom TDF and 24% of mega-firms use one.

Regarding asset classes, respondents showed the most interest in emerging markets, with 13% saying they would add or increase those offerings in the next 12 months. Ten percent were looking at increasing cash and cash-equivalent options, and 9% said they were increasing their offerings in active and passive U.S. public equities. “We see the most interest in these passive options among the mega plan sponsors,” York said.

“As competitive pricing information becomes more readily available, plan sponsors appear to be feeling pressure to focus more on plan fees,” York said. Nearly a third said they’re using fee disclosures for benchmarking purposes and a quarter will use them to negotiate lower fees. “The larger the plan, the higher the likelihood of future negotiation either lower fees or lower cost share classes,” York said.

When asked why they would drop a DC manager, the most commonly cited reason was underperformance compared to benchmarks. Sixteen percent cited lack of communication or responsiveness as a reason to drop their DC manager. More than a quarter said they would reduce the number of managers in order to reduce fees and expenses. “Clearly, fee sensitivity has been heightened and will likely play an important part in shaping plan investment design for some time to come,” York noted.

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Check out 401(k) Expenses Dropped in 2012: ICI on AdvisorOne.

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