Cost Concerns Driving DC Plan Sponsors to Change Investment Lineups

Findings from the latest Retirement Planscape, an annual Cogent Reports study by Market Strategies International, indicate 401(k) plan sponsors are consolidating the number of defined contribution (DC) investment manager relationships as well as the number of plan investment options in an effort to reduce plan costs.

For the first time, the desire to reduce fees and expenses outranks underperformance as the most common reason for dropping an investment manager from the plan lineup.

“It appears that fee disclosure regulations are driving a substantial amount of activity,” says Linda York, senior vice president of the financial services division at Market Strategies. “During this period of lower returns and lower yield, the impact of fees is magnified—another factor driving the focus on fees. This year, we find significantly more plan sponsors intending to take action in the form of negotiating for lower fees or lower-fee share classes, eliminating revenue-sharing arrangements, or consolidating the plan investment menu.”

The report notes differences in intended actions by plan size, with smaller plans more likely to request lower fees and larger plans looking for lower-cost, more personalized investment options. Despite reductions in investment options and relationships, the report finds an increase in the types of investment products offered in 401(k) plans. Mutual funds remain the most common investment vehicle offered, yet in search of performance and a more favorable fee structure, interest is rising in products such as managed accounts, exchange-traded funds (ETFs) and collective investment trusts (CITs).

The full report also examines trends in investment menu design as well as perceptions of 48 leading DC investment managers.

“All plan sponsors agree on the importance of strong, consistent investment performance, which not only boosts consideration potential if investment managers are highly associated with this attribute, but also detracts from consideration if a firm is perceived to have lagging returns,” says Julia Johnston-Ketterer, senior director at Market Strategies and coauthor of the report. “That said, competitive fees and fee structure become even more important as you go up market to large and mega plans.”

Information about how to request the report is here.