Data & Research May 11, 2016

Fees Can Affect Retirement Plan Participant Outcomes

Retirement plan advisers and sponsors should consider the compounding effect on fees when making fee decisions.
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Retirement plan sponsors and advisers try to teach employees to save in retirement plans early because of the effect of compound interest on savings, but there is also a compound effect on fees.

A research report from NerdWallet notes that a dollar taken out of a participant’s account to pay plan fees is one less dollar to invest, compound and grow.

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In one scenario NerdWallet analyzed, paying just 1% in fees would cost a Millennial more than $590,000 in sacrificed returns over 40 years of saving. In another scenario, a Millennial with the option of investing in either of two commonly held funds can save nearly $215,000 in fees—and, with compounding, retire nearly $533,000 richer—by choosing the one with fees that are 0.93% lower.

The numbers seem high, but the point is, investment and other plan fees do have an effect on participant outcomes—something plan sponsors can consider when monitoring investments or negotiating administration fees.  

NerdWallet suggests it is especially important to scrutinize fees of actively managed mutual funds. “Paying more for a mutual fund that is actively managed would be justified if the fund consistently outperformed its index-based peers,” the company says.

“Everyone talks about the benefits of compounding interest, but few mention the danger of compounding fees,” says Kyle Ramsay, NerdWallet’s head of investing and retirement. “We would not suggest only looking at fees when making investment decisions. However, plan sponsors need to think carefully about what they hope to get from an investment service or product, and whether that benefit is worth the fees. As [we found], 1% versus 0.5% may not feel like much over the course of a year, but when saving for retirement, it could mean the difference between retiring at age 70 versus retiring at 73.”

NerdWallet’s report can be found here.

The Markets May 10, 2016

Return Spreads Widen as 2016 Markets Remain Tough

Stronger bond returns could not match weaker U.S. and falling developed market equity returns, according to the Wilshire Trust Universe Comparison Service, dragging down institutional investor performance. 
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Institutional assets tracked by the Wilshire Trust Universe Comparison Service (Wilshire TUCS) saw a median return of 1.13% for the first quarter, which led to a median trailing annual loss of -1.17%.

Wilshire TUCS is a cooperative effort between Wilshire Analytics, the investment technology unit of Wilshire Associates Incorporated, and a group of custodial organizations serving a wide variety of U.S. institutional investors.

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Looking at data collected by the firms over the first five months of 2016, Wilshire TUCS shows the main exception to poor performance for first quarter was the U.S. real estate asset class, “due to a strong March, with the Wilshire US RESISM gaining 10.43% for March and 5.30% for the quarter.” Other assets classes used much more commonly in retirement plans and by other institutional investors lagged far behind. The Wilshire 5000 Total Market Index, for example, was up only 1.17% for the quarter, versus the MSCI EAFA or international developed market equity’s -3.01% loss for the quarter.

Robert Waid, managing director, Wilshire Associates, observes that bonds were stronger in the quarter, as the Barclays U.S. Aggregate gained 3.03%. This translates to a small range of plan returns with a low of 0% for large foundations and endowments with assets greater than $500 million and a high of 2.32% for large corporate funds with assets greater than $1 billion for the quarter.

“The spread for one-year returns was also small with a low of -2.20% for foundations and endowments and a high of 0.11% for Taft-Hartley health and welfare funds,” Waid adds. “Though all plan-type categories had positive median returns, a median return of 1.13% for all plans this quarter lags any annualized target and kept all plan-type categories negative for the year except Taft-Hartley Health and welfare funds.”

NEXT: Other highlights from the data 

According to Wilshire, this was the third quarter in a row where the 60/40 portfolio beat the median plan return, with a return of 1.91%. “Only large Corporate Plans beat the 60/40 portfolio in the first quarter,” Waid notes.

The backward-looking data from Wilshire also shows the differences in investment philosophies among different types of instructional investors. Corporate defined contribution plans, for example, tend to stick pretty close to the traditional 60/40 portfolio of bonds and equities, with the U.S. to international equity ratio standing at about 3:1.

Public plans, on the other hand, tend to carry about 10% more equity than their corporate counterparts, with more of the equity allocation going to U.S.-domiciled investments. Other differences emerged when filtering the data into groups of large and small plans, with larger plans of all types being likelier than their smaller counterparts to be using significant allocations to alternatives.

 Additional information and research is at www.wilshire.com. 

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