The Markets November 20, 2017

Sizable Group of Investment Managers Pledge to Lower Fees

The median investment management fee charged to retirement plans is 38 basis points, according to the Callan Institute.

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Twenty-one percent of investment managers plan to lower their fees in 2017, the Callan Institute found in its 2017 Investment Management Fee Survey.

Today, only 69% of assets in retirement plans are in actively managed funds, down significantly from 84% in 1996. The most common objection active investment managers hear from sponsors is whether they are providing the value-added services to justify their fees, cited by 49% of these investment managers.

The median fee that retirement plans pay for investments is 38 basis points (bps). By asset class it is 21 bps for fixed income, 34 bps for U.S. equities, 45 bps for non-U.S./global equities and 90 bps for alternatives. U.S. equities and non-U.S./global equities had the most dramatic movements between 2014 and 2016, with U.S. equity fees dropping 4 bps and non-U.S./global equity fees increasing 5 bps.

Investment managers are allocating a lower percentage of their revenue to bonuses: 18%, down from 24% in 2014. However, the amount of revenue allocated to cover the cost of operations increased from 42% to 60%. This may be why profit margin expressed as a percentage of revenue decreased from 34% in 2014 to 22% in 2016.

The percentage of investment management firms that offered performance-based fees dropped from 75% in 2014 to 64% in 2016. The types of funds that always use performance-based fees are all alternatives: hedge funds (60%), private equity (54%), infrastructure (38%), real estate (29%), hedge funds-of-funds (20%) and high yield fixed income (8%).

It is a common practice for investment managers to negotiate their fees, with 83% undertaking this practice, although this is down from 91% in 2014.

Callan’s report is based on responses from 59 asset managers representing $1.1 trillion in assets. Survey results also incorporated responses from 279 investment management organizations, supplemented by Callan’s Investment Manager Database of more than 1,600 firms. The full report can be downloaded here.

Data & Research November 20, 2017

Six Ways to Up the Ante on DC Plans

If the plan is not already automatically enrolling participants and escalating their deferrals each year, AB says, it should be.

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While some plan sponsors may be waiting for Washington to settle on new tax regulations for defined contribution (DC) plans, there are steps that they can be taking to improve their plans now, AB says in a new blog, “Six Steps to Take DC Plans to the Next Level.”

The first step, AB says, is to replace proprietary target-date funds (TDFs) from recordkeepers as the qualified default investment alternative (QDIA) with TDFs that use open architecture, and, in some cases, lower cost collective investment trusts, customized glide paths and in-plan guaranteed lifetime income.

If the plan is not already automatically enrolling participants and escalating their deferrals each year, AB says, it should be. Thirdly, sponsors should consider offering a financial wellness program to prompt their participants to become more engaged.

While using a QDIA and automatic enrollment are beneficial, AB says, sponsors should also revisit their investment lineup for those participants who want to select their own investments.

Fifth, sponsors should make sure that their retirement committees receive fiduciary training, and sixth, hire an adviser or consultant, if they aren’t already working with one. “This is especially important for plans with less than $50 million in assets,” AB says. “Smaller-size plans that employ a financial adviser fare much better than those that don’t—showing higher participation rates, higher average savings among participants and more participants improving their retirement readiness.”

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