Paring Down Investment Options

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Findings from the latest “Retirement Planscape,” an annual Cogent Reports study by Market Strategies International, indicate that 401(k) plan sponsors are consolidating the number of defined contribution (DC) investment manager relationships, as well as the number of plan investment options, in an effort to reduce plan costs.

For the first time, the desire to lessen fees and expenses outranks underperformance as the most common reason for dropping an investment manager from the plan lineup.

“It appears that fee disclosure regulations are driving a substantial amount of activity,” says Linda York, senior vice president of the financial services division at Market Strategies in Livonia, Michigan. “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. Despite reductions in investment options and relationships, the report finds an increase in the types of investment products offered in 401(k) plans. Interest is rising in products such as managed accounts, exchange-traded funds (ETFs) and collective investment trusts (CITs).