Avatar's management fee is 25 basis points, and Wilmington Trust charges ten basis points for its trustee services. In addition, each ETF has its own expense ratio that varies from seven basis points at the low end to as much as 70 at the high end. Carlson says they weight the various ETF expense ratios according to the relative weighting of the ETF in a fund, and that the total weighted expense can vary from 20 to 30 basis points.
One thing that helps keep Avatar's fees low is that collective trust funds have cheaper operating costs because they have less reporting and communication requirements than SEC-registered open-end mutual funds.
But there's a flip side to less reporting. "From a sponsor and participant standpoint, there's some difficulty in getting ready market information by doing a Google search for collective funds," says Mark Gutrich, CEO of ePlan Services, a Denver-based record keeper of 401(k) plans for small businesses that offers Avatar's funds to its customers. "There are some obstacles from a user's perspective when using collectives versus using open-end mutual funds. But I think the philosophies employed by both [structures] have pros and cons."
Another thing Thompson from iShares likes about Avatar is how it constructs different portfolios representing different risk levels, and then folds those different risk profiles into a target-date fund approach to create retirement glide paths that give investors more options.
The glide path is how target-date funds rebalance their allocations between stocks, bonds and other assets as the fund matures--the closer to the retirement date, the more conservative it becomes. Glide path construction played a big role in target-date performance during the downturn. On average, these "set it and forget it" funds lost 23% in 2008, according to Morningstar.
Critics howled that too many target-date funds had improper glide paths with too much equity exposure, particularly those with 2010 target dates purchased by folks closest to retirement. The worst of the 2010 target-date fund class lost 41%.
Avatar believes its flexible, tactical approach to portfolio management lets it make adjustments to better mitigate volatility than the static glide paths at other funds. It aims to smooth the ride toward retirement and prevent negative jolts that scare 401(k) investors and cause some people to bail on their plans. "The goal is to keep people invested and contributing to their plan because a person achieves their retirement goals more by contributing and compounding than by selecting an appropriate investment," Carlson says.
Regulatory Rumble
The aftermath of the market crash of '08-'09, as well as lingering fears about the country's looming retirement crisis, are keeping regulators busy.
The Labor Department in March will begin hearings on the feasibility of expanding the fiduciary standard under ERISA. And sometime this spring, the agency is expected to formulate the final rules for regulation 408(b)(2), which among other things aims to boost transparency and control risks in retirement plans.
And the U.S. Senate Special Committee on Aging, which held hearings on target-date funds in late 2009 and whose chairman, Sen. Herb Kohl (D-Wis.), stated that anyone operating under the Pension Protection Act should be held to a fiduciary standard, might examine the fiduciary issue later this year, according a committee staffer.