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Pensions & Investments: Shifts in 401(k) Options Illustrate Spotlight on Fees

August 7, 2019

NEPC's Ross Bremen was quoted in a recent article from P&I focused on key themes affecting the 401(k) space. Read the article below or on Pension & Investment's site here.

Changes made to the investment lineups of corporate 401(k) plans in 2018 reflect U.S. sponsors' ongoing focus on fee savings and fiduciary responsibilities, a Pensions & Investments analysis of recently released 11-K filings shows.

P&I analyzed reports filed between May 24 and July 25 with the Securities and Exchange Commission and found that 73 U.S. corporate 401(k) plans changed managers of at least one investment option. Those plans had assets totaling $243 billion and added a total of 171 new investment options from 52 managers in the year ended Dec. 31. Plans in that same universe removed 183 investment options from 61 managers during the same period.

Overall, the majority of fund changes involve equity investment options, data shows.

Among the 986 11-K filings observed over the period, 73% of changes were changes in equity options, while 10% involved fixed-income funds. Changes in target-date fund lineups accounted for 6% of changes, 4% in stable value funds and the rest in other asset classes.

 

In filings that provided such information, plans added 102 active funds and 57 passive funds and removed 109 active funds and 49 passive funds.

Defined contribution plan consultants say while no big surprises emerged in 2018, plans continued the trend of emphasizing fee savings and taking a closer look at their lineups in general.

Ross Bremen, a partner at investment consultant NEPC LLC, Boston, said that plans have been influenced in part by the raft of fee-related fiduciary lawsuits in recent years to examine their lineups more closely than in the past.

"There have been so many of these suits over time," he said. "It's been a variation on the theme, and so yes, to some extent fee levels themselves have been an issue."

"Even among passive managers, for example, there have been concerns about whether the cheapest fund available was in place (and) questions whether mutual funds should be used (or) cheaper collective trusts should have been considered when available."

Index fund changes

A number of plans changed their index fund providers in 2018.

One such plan was CRH Americas Inc., Atlanta, which added five passive investment options managed by Fidelity Investments to its 401(k) plan lineup in 2018, according to its new 11-K filing. The funds, which had $274 million in assets in the plan as of Dec. 31, took the place of four passive investment options managed by Vanguard Group.

As of Dec. 31, the CRH Americas 401(k) Plan had $2.6 billion in assets.

"Fee concerns have led to searches and replacement of managers, both on the active and the passive side," Mr. Bremen said.

Mr. Bremen said suits as well have raised questions among plan sponsors regarding the overall appropriateness of whether to go with active or passive managers, for example, and that the fear of lawsuits has made it more difficult for sponsors to know what the "right answer" is in their plan lineups.

The prevailing wisdom is that plans have moved more toward passive management from active management to save fees, but their focus has been toward rounding out their passive lineups with more funds rather than using them to replace active funds.

Greg Ungerman, senior vice president and defined contribution practice leader for consultant Callan LLC, San Francisco, said more plans are structuring their lineups with an active/passive mirror.

"It's kind of continued from the last few years, if you just offer maybe one or two index funds, they're adding a few more index funds to cover all the broad asset classes," Mr. Ungerman said.

Mr. Ungerman said plans have been moving more toward offering an active and passive version of each asset class rather than tilting more toward passive options.

"We don't see them replacing active funds with passive funds," Mr. Ungerman said. "They're looking at potentially to add a passive alternative so participants can have their choice. Quite honestly, from a plan sponsor level, it gives a lot of plan sponsors (pause) when all active managers go in and out of favor."

Jessica Ludwig, partner, associate director of institutional consulting at DiMeo Schneider & Associates LLC, Chicago, said in a telephone interview that clients are expanding their passive investment option lineups.

"There's just no denying we continue to see a huge push into the passive space," Ms. Ludwig said. "To the extent a plan sponsor did not already have a more expanded menu of index-based funds, we may have actually seen some clients add a few investment options only because they wanted to expand them."

If a plan had a lone S&P 500 index fund, Ms. Ludwig said, they would generally add perhaps a bond index fund, a small-, mid- or smidcap manager, or an international equity index manager.

ALLETE Inc., Duluth, Minn., was one such plan, according to 11-K filing data. In 2018, the plan added the Vanguard Total International Stock Index Admiral Fund to its lineup when it did not previously have an index fund in that asset class. As of Dec. 31, the ALLETE and Affiliated Companies Retirement Savings and Stock Ownership Plan had $485 million in assets, according to the 11-K filing.

D. Micah Fannin, Omaha, Neb.-based partner and senior investment consultant at Mercer LLC, said in a telephone interview that the primary driver for investment changes is the desire to streamline investment options, often after mergers and acquisitions.

"There's a general desire to streamline investment lineups, reduce redundancy, reduce overlap," Mr. Fannin said. "We want to make sure that the investment options in the plan have a distinct persona, a distinct reason for existing in the plan."

"With plan mergers, they just (put) all the investments together, and there's a mass of multiple investment options in the same asset class. They're not differentiated."

Mr. Fannin said plans inevitably seek to reduce the number of options after such mergers.

One such plan in 2018, according to its 11-K filing, was Charlotte, N.C.-based SPX Corp.'s Retirement Savings and Stock Ownership Plan, which had $624 million in assets as of Dec. 31.

The plan reduced its lineup to 12 investment options from 24 investment options during 2018.

Company spokesman Paul Clegg said the changes were made to simplify the plan's lineup. SPX had made a number of acquisitions over the years, and those company's 401(k) plans had been absorbed into this plan, creating a large lineup with redundant funds, he said.

Among the options removed were eight managed by Fidelity Investments that held a total of $190 million in assets in the plan as of Dec. 31, 2017, according to the company's previous 11-K filing.

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