In Practice April 27, 2015

Sharper Communications and Goal Setting Add Value

Advisers to retirement plan sponsors should regularly help their clients update communications strategies to keep up with participants’ needs and advancing technology.
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With each effort to engage retirement plan participants, plan fiduciaries should ask, “What is it we’re trying to communicate; do we have a clear call to action; what do we want to measure; and to what end?” says Elizabeth A. Piper, participant experience manager at Wells Fargo Institutional.

Plan sponsors have access to all kinds of participant data to help them see where they stand, Piper told attendees of the 44th Annual Retirement & Benefits Management Seminar, hosted by the Darla Moore School of Business at the University of South Carolina, and co-sponsored by PLANSPONSOR. She said communications should include a next best step for participants, and plan sponsors should track participant actions.

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Gap statements (how far participants are from where they should be) and retirement income projections let participants know where they stand. “If you pull in participants’ assets outside the plan, Wells Fargo has seen double digit action rates,” Piper said. She added that a good foundation for deciding what to communicate is deciding how to define success for the plan and participants.

According to Piper, what really moves the needle for success is:

  • Financial wellness programs – Money matters and financial matters are a significant worry for most people. If plan sponsors can help participants holistically with financial matters, it may help them find money to save for retirement, Piper said.
  • A plan for retirement – People who know how much they need to have saved, save four times as much.
  • Relevant and personal communications – Tell participants what relates to them, Piper urges, and communication should be based on age, life stage and circumstances.
  • Conversations – “Everyone wants to sit down and talk,” Piper said. “Whether it’s with a call center rep, HR staff or adviser.”

Piper shared some stats showing that growth of print communication is flat, email is steadily trending, phone communication is trending down, social media is spiking, in-person communication is also trending up and videos are one of fastest growing types of communications.

Communications should focus on the right things:

  • The right time – Piper suggested plan fiduciaries communicate at times participants are most likely to act. For example, upon hire, at life stage changes, tax time (to encourage them to put at least some of their refund in savings), when they take a plan loan, or after they attend an education meeting. “Grab people when they are thinking about financial matters,” she said.
  • The right approach – Plan officials should move beyond print and take advantage of new technology. “Billions of videos are viewed on Facebook every day,” Piper noted.
  • The right expertise – Education materials, videos and meetings should use someone participants will revere as having expertise.
  • The right message – Nudge participants to enroll, increase savings, or diversify investments. “Plan sponsors should also consider each generation’s view,” Piper suggested.

Why should plan sponsors use social media? Piper shared stats from Social Media Energy that says 90% of consumers trust peer recommendations, but only 14% trust advertisements; the average user spends 15 minutes a day on YouTube; and social media is the No. 1 activity on the Internet.

Piper suggested that plans can improve performance by investing in mobile enrollment and transaction capabilities. They can send an email, text or tweet on Twitter congratulating a participant on taking an action and suggesting a next step. For example, the message may say, “Congratulations on enrolling in the plan. Are you saving enough?” Plan sponsors can offer debt management or other financial education via blogs, YouTube videos, or videos or games on Facebook.

“Plan sponsors should ask employees how they want to receive information,” Piper said.

The Markets April 24, 2015

Morningstar Shows Lowest Cost Funds Dominate Flows

The last decade saw an impressive 95% of investment fund flows go to the lowest-cost quintile, according to a new Morningstar report.
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A new Morningstar study shows fund expense ratios declined again in 2014 as investors across individual and institutional channels sought low-cost investment products.

The research shows the asset-weighted expense ratio taken across all funds tracked by Morningstar stood at 0.64% at the end of 2014—down slightly from 0.65% in 2013 and significantly lower than 0.76% observed five years ago.

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“Investors continue to move away from load-based share classes to those that do not charge loads, which also tend to have lower expense ratios,” the report explains. “Firms that offer lineups with lower asset-weighted expense ratios … have gained market share during the past five years.”

But asset managers aren’t exactly rushing to cut prices: While 63% of fund share classes and exchange-traded products examined by Morningstar reduced their expense ratios during the past five years, just 24% saw fees decrease more than 10%. Meanwhile, Morningstar says, more than one in five (21%) share classes examined actually increased their fees.

All of this takes place against the backdrop of an industry that saw assets under management rise 143% over the past 10 years. Morningstar says this pushed estimated industry fee revenues to an all-time high of $88 billion in 2014, up from $50 billion 10 years ago, while the asset-weighted expense ratio declined 27%.

Examining the Morningstar report closer reveals the lower fee trend “is being driven more by investors seeking low-cost funds than it is by fund companies cutting fees.” Fund investors are buying passive funds at higher rates and are investing in lower-cost options when the decision is made to go with active management approaches.

Morningstar finds strong asset growth, especially among institutional investor channels, has spurred fee reductions by triggering built-in “breakpoints” on management fee schedules. These breakpoints are often preprogrammed into relationships between large asset owners and the investment firms they rely on—such that portfolio growth above predetermined hurdles activates fee reductions.

Still, much of the increased economies of scale are going to fund industry interests rather than to investors, Morningstar says. Stated more directly, assets under management have risen faster than fees have fallen, and this pattern seems likely to continue.

Another interesting line of thinking presented in the report explains why the asset-weighted expense ratio is more informative for industry analysts to consider above a straight average—especially when reviewing a sample that includes a very significant pool of money invested by a select group of major asset owners, from mega retirement plans to university endowments, which tend to negotiate substantially lower prices for investments via their impressive size.

As Morningstar explains, “We emphasize the asset-weighted expense ratio rather than a straight average, as it is more representative of the actual costs borne by investors than a straight average. Equal-weighted averages tend to be skewed by a few outliers—high-cost funds that attract few assets, in this case.” Looking at the Morningstar fund universe, the equal-weighted average expense ratio for all funds in 2014 was far higher than the asset-weighted ratio, at 1.19%.

Importantly, funds with an expense ratio above 1.19% held just 9% of total assets at the end of 2014. This implies, according to Morningstar, that some 91% of investors’ assets were invested in funds with an expense ratio less than or equal to 1.19%.

“Thus, the equal-weighted average expense ratio is a bit of a straw man,” the report concludes. “The asset-weighted expense ratio, which best reflects investors’ collective experience, was 0.64% in 2014.”

Morningstar says mutual funds and exchange-traded funds (ETFs) with expense ratios ranking in the least-expensive quintile of all funds attracted an aggregate $3.03 trillion of estimated net inflows during the past 10 years, “compared with just $160 billion for funds in the remaining four quintiles.”

“That is to say that 95% of all flows have gone into funds in the lowest-cost quintile,” the report notes. “Passive funds (mutual funds and ETPs) have been prominent recipients of the capital flowing into low-cost funds. Compared with funds falling in cost quintiles two through five, funds in the lowest-cost quintile are more likely to be index funds.”

Not surprisingly, the report shows an investor’s decision on the active versus passive question will have a big impact on the fees faced. The asset-weighted expense ratio for passive funds was 0.20% in 2014, the report shows, compared with 0.79% for active funds.

“Estimated net inflows to passive funds in 2014 totaled $392 billion, topping the $66 billion of flows into active funds,” the report continues. “During the past 10 years, passive funds have collected $1.90 trillion in net new investor capital compared with $1.13 trillion for active funds. The difference is even starker among U.S. equity funds. Passive funds focused on U.S. stocks have attracted $671 billion of inflows during the past 10 years, compared with outflows of $731 billion for active U.S. equity funds.”

Morningstar concludes that passive funds “now account for 28% of the total assets in the universe we’ve examined, up from 13% in 2004.”

The full study is available here.

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