In 2017, 73% of Ascensus’s plan-sponsor clients offered passive or index investments, while only 24% did in 2011. Passive or index funds made up 38% of the total assets in the 401(k) plans Ascensus administered in 2017, whereas they represented only 7% of assets in 2011. These figures exclude target-date funds, which in 2017 represented 25% of the assets in Ascensus’s 401(k) plans, and also exclude company stock and self-directed brokerage assets.
Transparency Is King
Denver-based Russ Shipman, managing director of the retirement strategy group at Janus Henderson Investors, which manages $25 billion in defined contribution assets across more than 200 platforms, partly credits the dip in bottom-line 401(k) fees to growing investor awareness and increasing market share among the largest investment complexes participating in the space. The increase in scale among providers has created cost-saving synergies for these fund families, which they’ve passed along to investors, he says.
But from what Shipman is observing, the rate of decline in 401(k) fees is slowing. “The fairly relentless compression across the industry I wouldn’t say has completely disappeared, but it’s certainly eased,” he says. “Transparency is probably more the watchword right now” than the pressure to further reduce fees.
The most prominent and persistent trend he’s noticed is the ramping up of clean share structures—products that lack loads and 12b-1 fees (the fees associated with marketing and distribution). “There’s been an unbundling, a decoupling, a deeper understanding of fee constructs,” he says.
According to a 2017 survey of asset managers by Cerulli Associates, over 85% offer a non-revenue-sharing mutual fund share class that’s devoid of 12b-1 fees and sub-transfer agency (sub-TA) fees. The survey also found that asset managers offer a non-revenue-sharing class for nearly 80% of their investment strategies.
Like Musto, Shipman urges advisors and plan sponsors to resist the urge to make decisions based on fees alone. “Lurching to the cheapest share class—and the Department of Labor has offered guidance on this—is wrongheaded,” says Shipman. “You cannot say you’ve satisfied your fiduciary duty by going cheap.”
Instead, says Shipman, advisors and plan sponsors must also ask: What is the process of the underlying investment manager? What are the risk controls? What is the corporate structure? What other items of intangible interest are being dispensed from that organization?
“All of those things stitched together comprise what we like to point to as simply the value,” he says, adding, in that sense, fees are but one input.
Fees must be discussed client by client, says Shipman, because each plan and its participants have different objectives. A growing number of investors want to understand “not just the ins and outs of their portfolio, their asset allocation, etcetera,” he adds, “[but also] how those component parts snap together fee-wise.”