The Markets May 12, 2014

Institutional Investors Increasing ETF Use

The use of exchange-traded funds (ETFs) by institutional investors is increasing, a study finds.
Reported by

According to Greenwich Associates’ report “ETFs: An Evolving Toolset for U.S. Institutions,” as recently as 2011, less than 15% of U.S. institutions were using ETFs in their portfolios. That share climbed to 18% in 2012 and reached 21% in 2013.

But the overall averages understate the extent to which ETFs have been embraced by certain types of investors, Greenwich Associates says. For example, 40% of U.S. endowments employ ETFs in their portfolios, as do one-third of the largest public defined benefit (DB) pension funds—those with at least $5 billion in assets under management (AUM)—and roughly 25% of the largest corporate defined benefit funds.

Never miss a story — sign up for PLANADVISER newsletters to keep up on the latest retirement plan adviser news.

Although ETFs represent a small percentage of total U.S. institutional assets, some institutions have begun building sizable ETF allocations. Forty-six percent of institutional ETF users that participated in Greenwich Associates “2014 U.S. Exchange-Traded Funds Study” allocate 10% or more of their total assets to the funds, with almost three in 10 reporting ETF allocations from 10% to 25%, and nearly one in five making even greater allocations.

The current study shows that institutional investors adopt ETFs for routine portfolio functions, as well as a means to obtain long-term strategic investment exposures. This year, approximately 80% of participating institutions that use ETFs do so to obtain core portfolio exposures, making this the most common ETF application among study participants. That share is up from the 74% using ETFs for this task in 2013.

ETFs are gaining traction in asset classes outside equities, especially in fixed income, where changes in market structure could boost ETF use. The share of institutional users employing the funds in domestic fixed income increased to two-thirds this year from just 55% in 2013. Another 35% of institutions overall utilize ETFs for international fixed-income access, up from 29% last year. Forty percent of the institutional ETF users employ the vehicles in commodities, and 45% use them in real estate investment trusts (REITs).

In addition, ETF holding periods are lengthening. The share of institutions reporting average holding periods of two years or longer jumped to 49% in 2014 from 36% in 2013.

The results of the study suggest ETFs will continue to gain momentum in the coming year. Among institutions currently employing ETFs in their portfolios, nearly half say they expect to expand use in the next year. One-third of the institutions in the 2014 study expect to grow allocations by 1% to 10%, while nearly 15% plan to increase them by 10% or more.

For the study, Greenwich Associates interviewed 201 U.S.-based institutional exchange-traded fund users in an effort to track and uncover usage trends. The respondent base included 49 institutional funds (corporate pensions, public pensions, foundations and endowments), 32 asset managers (firms managing assets to specific investment strategies/guidelines), 31 insurance companies, 70 registered investment advisers (RIAs) and 19 investment consultants. The study was sponsored by BlackRock.

The study report may be requested from here.

Products May 12, 2014

Russell Handbook Highlights Imperative Practices

Plan sponsors need to understand key issues as they meet their fiduciary obligations in this changing world, Bob Collie of Russell Investments says.
Reported by

“It feels like a long time since defined contribution [DC] was the soft fiduciary option,” says Collie, chief research strategist, Americas Institutional, for Russell Investments. Defined contribution plans were once the easy choice, relative to defined benefit (DB) plans. But that time is long over.

The world is changing, and there’s more change to come, Collie says. Today, 69% of corporations offer defined contribution plans exclusively, making them the primary retirement savings vehicle for the majority of Americans, but plan sponsors could be doing more to keep pace with today’s retirement challenges.

Never miss a story — sign up for PLANADVISER newsletters to keep up on the latest retirement plan adviser news.

Plan sponsors can get practical advice about creating a best-in-class plan that improves retirement outcomes for participants and also meets fiduciary obligations in Russell’s new fiduciary guide, “A Defined Contribution Retirement Plan Handbook.”

Collie says it feels strange to look back and realize that Section 401(k) of the Internal Revenue Code (IRC) was originally an add-in to the Revenue Act of 1978. According to one of the principal authors of that section, he says, it was only included as part of the political horse-trading needed to gain support for an act primarily designed to cut taxes. “It was not expected to change the world,” Collie says.

It is no wonder, then, he says, that the defined contribution world increasingly moves toward the institutional investment model. Features such as automatic enrollment and target-date funds (TDFs) are now used to make the 401(k) plan more effective as the primary retirement vehicle for a huge section of the American work force.

Tax considerations remain central for the future, Collie says. “Now, the question is how the government can find additional sources of revenue,” he says. Another emphasis will continue to be how to make sure defined contribution plans generate a lifetime of income after retirement, rather than simply acting as tax-efficient savings vehicles before it.

Russell’s defined contribution team continues to push plan sponsors to aim for excellence, according to Collie. The prevailing attitude at Russell is that plan sponsors who merely aim for “good enough” are in fact already falling short, he says. Collie describes the handbook as an overview of the current status of the key issues that affect DC plans. 

Issues Overview

The handbook’s three sections—plan governance, investment considerations and retirement income—are designed to help plan officials gain a more complete understanding of the issues and options important to consider in designing and implementing defined contribution plans focused more directly on boosting retirement income for plan participants. The handbook examines trends shaping the DC landscape and plan design, and provides insights into plan fees and default investment considerations, asset class menus, and recommendations for how to think about income solutions.

“Now is the time for plan sponsors to take an even more active role in helping address America’s retirement savings needs,” says Josh Cohen, managing director and head of institutional defined contribution at Russell. “Some simple improvements can move a plan toward excellence, and this handbook offers clear recommendations on what success ultimately looks like and a path to get there.”

Cohen says the handbook is ideal for committee members, investment and human resources (HR) staff, and advisers interested in learning more about different aspects of defined contribution plans. The guide was compiled by three experts in defined contribution at Russell: Mark Teborek, Kevin Knowles and Michelle Rappa.

The well-known challenges of too few workers enrolling in the plans, and too little being saved by those who do, should compel plan sponsors to do more to encourage participation, says Rappa, director of business growth for defined contribution. “Effectively engaging participants requires not only good communication but also the right plan design attributes,” she says. “Auto-enrollment and auto-escalation of contributions, robust investment defaults, as well as re-enrollment and mapping to default investments, are must-have features for plans that want to positively influence retirement outcomes.”

According to Cohen, the complexities of setting a strategy, implementing and administering a plan, and complying with the Employee Retirement Income Security Act (ERISA) and other Department of Labor (DOL) regulations and requirements are stretching plan sponsors to the point where they must make strategic decisions about what DC plan responsibilities to retain in-house and what to delegate to specialist fiduciaries. “Sponsors must clearly understand who is responsible for governing the plan, who is responsible for implementation and who is responsible for reviewing to make sure things go smoothly,” he says. “The handbook details what a continual governance process looks like and makes the case that governance often requires that plans seek out and delegate aspects of their plan management to third-party experts as needed.”

“A Defined Contribution Retirement Plan Handbook” is available through Russell’s website.

«