Evolution in Investment Vehicles Presents Opportunity

During the August edition of the 2022 PLANADVISER Practice Progress webinar series, two experts who have long embraced collective investment trusts, exchange-traded funds and separately managed accounts as emerging investment options discussed the rapidly evolving marketplace of defined contribution plan investments.

Research from firms such as BrightScope and Cerulli Associates shows key DC plan decisionmakers, including advisers and consultants, continue to favor collective investment trusts, largely due to their relatively low-cost structure and pricing flexibility, the speakers noted. Today, 401(k) plan assets in CITs have eclipsed the $2 trillion mark, and the growth is expected to accelerate as more investors catch on and the DC plan product set develops.

CITs already dominate the large plan market, particularly within target-date funds, data show, but many CIT providers have recently lowered their investment minimums and, in certain cases, waived them altogether. Cerulli’s reporting says that those with low or no investment minimums are more tenable investment options for smaller plans—and that advisers can help promote stronger adoption down market, where higher investment fees remain a pressing issue.

Faron Daugs, founder and CEO of Harrison Wallace Financial Group, said that use of ETFs also continues to swell, and that his firm has slowly but surely been moving away from mutual funds. Daugs’ firm, importantly, focuses primarily on individual and family wealth management, and so his perspective on investment options is different from the typical DC plan adviser.

“As we kind of dissect our client portfolios, we seek to give them exposure to things like sector-type funds or even sub-sector funds. We may want them to have technology exposure, for example, but more importantly, we want them to have that targeted cybersecurity or artificial intelligence exposure,” Daugs said. “For our individual clients, it has been a benefit to have something that can actually be a little more concentrated. We can target semiconductors or cybersecurity through one ticker.”

For their part, mutual funds have seen substantial price compression, Daugs said, and they remain important investment vehicles. But in the individual and family planning market, the appeal of intraday trading has pushed ETFs forward.

Brent Sheppard, partner and financial adviser at Cadence Financial Management, noted intraday trading is not a thing for retirement plans. He agreed that ETFs play an important role on the induvial side, but he is not sure they are as beneficial for retirement plan clients—especially if CITs are being introduced to plan sponsors to bring down fees.

Client Investments

When it comes to whether or not his clients understand or care about what specific investment vehicle they are in, Daugs said that the majority of his clients at least want a general working knowledge of what they own. He usually meets with his clients at least once every six months to give “them a little bit of a peek into what is under the hood.”

“If I know that they always go to Starbucks, for example, then I can say, ‘Oh, by the way, this fund owns Starbucks.’ They feel good about that,” Daugs said. “So, from that perspective, I think they do kind of want to know at least a little bit about what they do own.”

Daugs also tries to get his clients to maximize their DC plan contributions as much as possible, while educating them on what their investments are in their 401(k) plan. He tries to treat all the clients’ investments as one portfolio.

“We will often treat the client’s 401(k) investments as the core of their retirement strategy,” Daugs said. “Then, with the other outside investments they have with me, maybe we are building more of a satellite portfolio to introduce some of those sector-focused ETFs. Maybe we are going to be a little more tactical with the outside investments. They understand that we are treating everything as a whole.”

Retirement Planning Financial Health

There are many different investments available within retirement plans, but when acting as a fiduciary, most advisers try to keep the lineup pretty simple for participants, Sheppard said. He also noted how, while there is still a coverage gap in the U.S., companies that sponsor plans have had great success moving the needle with automatic enrollment and auto-escalation.

“There are so many helpful tools and technologies out there,” Sheppard noted. “However, building a truly individualized financial plan for the masses is difficult. Scalability remains a challenge.”

Sheppard cited data from an industry survey that shows only about 50% of employees who do not have a financial adviser or a financial wellness program feel that they are in a good to excellent financial position. Similarly, 50% of those without advisers or plans are able to make debt payments easily.

“If you implement a financial adviser and a financial wellness program, 93% of employees were in a good to excellent financial situation,” Sheppard noted. “If you can get employers to work on financial wellness programs and convince them of the importance of getting financial advisers engaged with employees, it adds a ton of value.”