Learning from Asset Managers’ Defined Contribution Plans

Callan CEO and Chief Research Officer Greg Allen recently authored an analysis of the retirement plans investment managers offer their own employees, aptly titled “The Cobbler’s Shoes: How Asset Managers Run Their Own 401(k) Plans.”

In a report co-written with Matt Loster, a vice president in Callan’s Measurement Development Group, the pair analyzes U.S. Department of Labor data of 157 asset management firms and compares that data set to a broader population of 55,000 plans.

The report shows that the asset management industry has “wholeheartedly embraced the 401(k) plan as the vehicle of choice for its own employees.” According to Loster and Allen, investment management firms scored “extremely well” on the metric of average participant balances as compared with the broad population of 401(k) plans. Callan’s data shows the average balance in manager-sponsored plans was $179,171 as of the end of 2016. This was more than four times the average of $42,394 for the broad Form 5500 database population of 55,000 plans, the report says.

“This trend begs the question as to whether investment manager-sponsored plans as a subgroup might be able to provide some useful insights on plan design and implementation,” Loster and Allen write. “Overall, the investment management industry scored high marks on the two most important retirement savings success metrics, high contribution rates and in turn high average balances.”

Loster and Allen attribute this to generous matching policies, profit-sharing, high salaries, and long employee tenure. Results were more mixed, however, when evaluating other elements of plan design—particularly investment menu design—versus industry best practices.

“In contrast to the current industry consensus, asset managers generally embraced complexity over simplicity in their investment designs,” the pair writes. “They also had relatively low adoption rates for target date funds (TDFs) and relatively high usage of brokerage windows. Manager-sponsored plans (and their participants) in our dataset had a strong preference for actively managed strategies compared to plans within the broad population, not surprising given that many of these firms oversee actively managed strategies.”

Proprietary Approach Remains Popular

According to Loster and Allen, the prevailing philosophy for the asset management industry seems to be that its participants are sophisticated investors and should be given a broad universe of choices. This is reflected by the fact that, in the sample of 157 asset manager-sponsored plans, the median number of investment options was 39, while the mean was 43.

“While this philosophy may be the right one for portfolio managers and other highly compensated investment professionals, it is not clear from a fiduciary standpoint that it should be extended to the broad population of DC plan participants, most of whom are non-investment professionals,” they write. “It will be interesting to see whether the increasing litigation pressure being exerted on investment management-sponsored 401(k) plans will cause them to migrate in a similar direction.”

The report notes that investment managers are grappling with the question of whether it is appropriate to use an investment menu that is mainly or exclusively populated with proprietary products.

“From a business perspective, managers often want to offer their employees the opportunity to invest in their own products. This ‘eat your own cooking’ philosophy is often offered up to clients and prospects as evidence of alignment of interests as well as the conviction that the firm’s employees have in their own products,” the report says. “From a fiduciary perspective, however, the case for the use of proprietary products in a 401(k) plan is not as clear. For one, most managers do not have investment vehicles available where they don’t charge a management fee. This raises potential conflict concerns since the firm stands to benefit financially from its own employees investing in its products. In a related but more subtle way, managers can also potentially benefit by increasing the AUM in strategies offered as options within their 401(k) plan.”

Of the 157 plans in the Callan dataset, 92 offered proprietary products. In the case of the plans that did not, some did not manage mutual funds and thus did not have “DC-friendly” vehicles to offer within their plans. In many cases, however, the sponsor managed products offered in mutual fund or collective trust vehicles but made the explicit decision to exclude them from their plans to avoid the potential fiduciary issues.

Beyond these high-level conclusions, Loster and Allen look closer at the different types of firms working in the asset management space. In one section of the report, they investigate the impact of a firm’s ownership structure on its support of retirement savings. Firms were broken into categories based on their ownership structure: “Employee-Owned,” “Private Partnership” (presumably a mix of employee and outside owners), “Subsidiary,” “Publicly Owned,” and “Other.”

“The private ownership model seemed to lead to higher balances and higher contributions by the employer,” the pair finds. “This data seems to support the intuitive case that employee ownership allows an organization to place a greater emphasis on long-term investments in its employees, potentially at the expense of maximizing current profitability. On the margin, this should also lead to greater longevity, which also contributes to higher balances.”

Deep Dive into Asset Manager Plan Designs

The 2018 PLANSPONSOR DC Survey included 11 retirement-focused asset managers. While the sample size is small, the survey responses show some clear areas of both consensus and difference in the plan designs and benefit types embraced by these plan sponsors. The data also allows for a comparison of asset managers’ retirement programs versus the broader DC survey results.

In the sub-sample of asset managers, 90.9% offer a 401(k) plan as a core part of their retirement benefits package, which closely matches the 88.9% of employers offering a 401(k) reported in the full survey sample. According to the DC Survey, 33.3% of retirement programs overall include a distinct profit sharing plan, while this is true for 36.36% of the asset managers. The low incidence of money purchase plans and open defined benefit pension plans is another point of similarity between asset managers and the full group of survey respondents.

One apparent point of difference between asset managers and the broad sample is in the offering of health savings accounts (HSAs). While 88.9% of the full sample provides access to HSAs, 81.8% of asset managers do so. About 72% of the asset managers use collective investment trusts, while only about 60% of the broad sample does so. Reflecting the Callan data, asset managers are also likelier to say that all or nearly all of their employees are deferring enough into the retirement program to get the full match.

Among the asset managers responding to the DC Survey, just one reported not have implemented any financial wellness initiatives in the preceding 12 months. Most say they have provided on-sight group meetings and have leveraged resources from retirement plan recordkeepers. Most have also implemented both targeted and generalized communications campaigns aimed to improving participant outcomes.

When it comes to distributions, all but one of the asset-managers allows for in-service distributions tied to the attainment of a specific age. Looking at systematic withdrawal services for retirees, however, only 63% of the asset managers offer this. This is close to the 66.7% figure reported in the full survey.

Similar to the broad sample, asset managers report using a variety of types of default investments, and not just different types of target-date funds. Some use balanced funds while others use custom options. Other points of similarity in the asset manager sub-sample are the very low incidence of in-plan insurance based investment products that guarantee monthly income at retirement; the low incidence of in-plan professionally managed account services that help participants turn account balances into monthly retirement income; the low incidence of in-plan managed payout funds specifically designed to generate a cash flow stream but lacking the guarantee of insurance products; and the low uptake of out-of-plan annuity purchase/bidding services.