Lower fees continue to dominate 401(k) industry discussion, and now 401(k) plan sponsors are consolidating the number of defined contribution investment manager relationships, as well as the number of plan investment options, in an effort to reduce plan costs.
Moreover, 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, according to Retirement Planscape, an annual Cogent Reports study from Market Strategies International.
“It appears that fee disclosure regulations are driving a substantial amount of activity,” Linda York, senior vice president of the financial services division for the company, said in a statement. “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.
In fact, 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, ETFs and collective investment trusts (CITs).
“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,” added 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.”
At the firm level, Fidelity Investments and Vanguard dominate the 401(k) investment market, claiming a wide lead in brand across all segments of the market. Rounding out the top five are Wells Fargo, T. Rowe Price and Charles Schwab Investment Management. American Funds and BlackRock are the only other firms to rank in the top 10 across all plan size segments.
Top 10 DC Investment Managers Brand Equity by Plan Size
| Rank | Micro | Small-Mid | Large-Mega | |||
| 1 | Fidelity Investments | Fidelity Investments | Fidelity Investments | |||
| 2 | Vanguard | Vanguard | Vanguard | |||
| 3 | Wells Fargo | Wells Fargo | Wells Fargo | |||
| 4 | T. Rowe Price | T. Rowe Price | T. Rowe Price | |||
| 5 | Charles Schwab Investment Man. | Charles Schwab Investment Man. | Charles Schwab Investment Man. | |||
| 6 | American Funds | American Funds | J.P. Morgan Asset Man. | |||
| 7 | J.P. Morgan Asset Management | Principal Funds | Prudential Financial | |||
| 8 | PIMCO | PIMCO | AllianceBernstein | |||
| 9 | BlackRock | AB (formerly AllianceBernstein) | American Funds | |||
| 10 | Goldman Sachs | BlackRock | BlackRock |
Base: All Plan Sponsors
Source: Market Strategies International. Cogent Report™. Retirement Planscape: May 2016.