The Markets May 27, 2014

Passive Investment Momentum Continues

The strong growth of passive investment products shows little sign of slowing over the short term and could signal an important secular trend, according to new research from Cerulli Associates.
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Passive mutual fund assets have grown considerably in the last five years, jumping from $542.1 billion in early 2009 to $1.7 trillion as of year-end 2014, according to Cerulli’s recent report, “The Cerulli Edge: U.S. Monthly Product Trends Edition.” Despite a slow start in January, the growth of index strategies has continued this year as passively managed mutual fund flows combined with exchange-traded fund (ETF) flows to reach $56.7 million year-to-date. By contrast, actively managed funds received $82.8 million so far this year.

Cerulli researchers point to a number of explanations for the increased popularity of passive mutual funds and ETFs. Put simply, even more than investors’ emphasis on mitigating risk, which can push them towards active strategies, the industry-wide focus on lowering investment costs is driving higher allocations to passive management.

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Inflows for active strategies still outpace inflows for passive products, but Cerulli says active managers should be increasingly wary as passive investments show signs of picking up additional momentum and eating away at the actively managed asset base. And unlike earlier cyclical fluctuations between active and passive investment style leadership, the ongoing upswing in passive investment usage could be more permanent as investors become increasingly fee conscious.

To compensate for growing inflows to passive investment strategies, active managers are developing new products that do not compete directly with passive strategies, Cerulli says. Numerous providers have released multi-strategy and outcome-oriented products for both retail and institutional investors, for example, to bring additional value to offerings beyond risk mitigation. It will be important for providers to explain these new products effectively, Cerulli says, and to make the case that funds with lower fees aren’t necessarily better investment options.

Among mutual funds, the split between active and passive flows varies markedly by asset class. Active traditional and core U.S. strategies are most vulnerable to the growth of index-based strategies, Cerulli says. For example, more than $60 billion of U.S. equity flows in 2013 were directed into passive strategies, compared with only $3.4 billion steered into active funds.

Moreover, actively managed taxable bond mutual funds saw outflows flows of $9.8 billion during the period, whereas passively managed taxable bond funds drew in net flows of $31.8 billion for 2013, according to Cerulli.

The report notes a number of other key trends in investment product usage, including the following:

  • According to a recent Cerulli survey, asset managers are essentially unanimous in their belief that international and global equity and fixed-income passive strategies (including enhanced index and smart beta products) are likely to take market share away from active investment strategies in the institutional channels over the next 24 months (see “A New Look at Old Beta”).
  • Mutual funds saw net inflows of $27.8 billion in April. For a second consecutive month, taxable bond mutual funds topped all other asset classes, with monthly net inflows of $8 billion in April, despite bank-loan funds being in net redemption territory during April.

April net inflows into ETFs of $18.5 billion helped lift the vehicle's year-to-date flow total to $30.3 billion, Cerulli says. International equity ETFs topped the flow league table in April with $8.5 billion. U.S. equity and taxable bond ETFs followed with net flows of $3.8 billion and $3.6 billion, respectively.

More information on how to obtain the latest Cerulli Research is available here.

Data & Research May 27, 2014

Easier Enrollment Leads to Better Participation

Simplifying the 401(k) plan enrollment process may help employees save more effectively for retirement, says a recent paper from Bank of America Merrill Lynch.
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The paper, “Simplifying the Path to Financial Wellness: Four Strategies to Help Increase 401(k) Participation,” finds 60% of employees who participated the firm’s recent Employee Workplace Benefits Report Survey are finding it difficult to reach their retirement savings goals. The authors of the paper believe that these employees are often “not taking advantage of the easiest way to pursue retirement security,” which they say is by participating in a 401(k) retirement plan.

Simplifying the enrollment process is one of the most cost-effective steps plan officials can take to help their employees save for retirement and achieve greater financial wellness, according to the paper. Too many choices can overwhelm employees and discourage them from participating in their retirement plan, the authors explain. 

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Plan officials should consider reducing the number of upfront decisions that employees are required to make during enrollment, the paper says. They should also present employees with a limited number of contribution rate choices and investment funds to further simplify decision making.

The paper identifies three other strategies to help plans improve participation, which include:

  • Automatic enrollment plan features. Such features can get employees onto the path of saving as soon as they are eligible to participate in their plan. Plan sponsors should look at implementing automatic enrollment and applying it to both new and eligible, nonparticipating employees. They should also consider adding an automatic contribution escalation feature. 
  • Encouraging enrollment throughout the year. Plan sponsors should target nonparticipating employees on a regular basis, communicating the importance of saving for retirement and the value of benefits offered. Frequently reinforcing the message may improve retirement planning priorities. Plan sponsors should also remind employees of where to find readily available information on enrolling and making changes to their selections.
  • Integrate enrollment events. The paper also recommends that plan sponsors consider linking 401(k) enrollment with similar events, such as open enrollment for health care benefits, to take advantage of employees being in an “enrollment mindset.” Plan sponsors can provide access to retirement plan offerings through their health care enrollment portal or provide a link from the health care site to the 401(k) enrollment site.

The authors of the paper conclude, “Savvy employers recognize that they are part of the solution. By automating and streamlining the enrollment process, increasing awareness of the benefits offered, and encouraging employees to participate at every opportunity, plan sponsors can help lead employees to make positive 401(k) plan choices that help drive better outcomes.”

The paper was released by Bank of America Merrill Lynch’s Retirement and Benefit Plan Services division as part of its Workplace Insights series and can be downloaded in full here.

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