Cogent: Interest Growing For ETFs In 401(k)s

June 17, 2013

401(k) plan sponsors looking to change investment options are open to ETFs, Cogent says.


The world of 401(k)s appears interested in making changes in the coming year in investment options in various investment plans, according to a study by Cogent Research, the Boston-based financial industry research firm.

Linda York, an executive at Cogent and the author of “The DC Investment Manager Brandscape” report, told Managing Editor Olly Ludwig that plan sponsors are interested in better-performing funds and in lower fees. That focus on fees is creating an openness to passive investment vehicles, including ETFs, once the typical 401(k) can handle exchange-traded funds, York said. What stuck out in the latest defined contribution plan survey?

York: The thing that stuck out is the number of planned sponsors who are looking to make a change in their investment lineup in the coming year. Slightly over half—51 percent—said they were going to modify their investment menus in some fashion, whether it be to increase or decrease the number of options they offer or to keep the number the same and to swap out one investment option for another.

That’s a substantial amount of activity compared to what they reported they did last year, which was 44 percent. Conversely, when we looked at what planned sponsors are doing on the plan provider standpoint, there was only about 6 or 7 percent that said they were going to switch providers in the coming year. So, not much movement on the record-keeping front, but a substantial amount of activity anticipated on the investment menus. To what extent can you generalize about what that 51 percent is interested in doing? Are we talking about ditching underperforming funds; different kinds of wrappers, whether they be closed-end funds, or ETFs or whatever?

York: One of the things we saw that’s affecting the underlying investments that these plans are using in their menus is the impact of these fee-disclosure requirements that were enacted in 2012. We did see that the market seems to be more fee-conscious, if not fee sensitive. And that may be driving a lot of these investment-menu changes—in addition to underperformance. When we asked what the reasons specifically were if plan sponsors dropped a manager or changed out some investment options, underperformance was the first reason, to reduce fees, and expenses was the second. When you talk about fee reductions, are we talking about expense ratios or other administrative fees?

York: In this particular study, we’re talking about the fees associated with the investment option, not the plan administration. So does that focus on fees imply an openness or a transition to index vehicles that tend to be cheaper and will deliver returns that may be better than those on active funds?

York: I absolutely think that is a natural conclusion. In fact, when we asked about the different types of investment vehicles, or within asset classes, and what plan sponsors were likely to be adding versus decreasing, we did see a little bit more interest in the passively managed funds, and more particularly, in the very largest end of the market—the mega-plan sponsors, which have $500 million or more in plan assets.

We find that segment does tend to lead market trends. So, more of these very large plans are interested in adding more passive vehicles in their lineups than they currently have. Could this be a leading edge of a potentially powerful trend?

York: I would absolutely say that. The mega-plans tend to lead market trends.



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