The Markets June 21, 2019

Index Funds Nearly Universal in Large 401(k) Plans

A BrightScope/ICI study also found collective investment trusts (CITs) accounted for a larger share of assets in larger plans than smaller plans.

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Index funds have grown in popularity by 401(k) plan sponsors since 2006, according to the report, “BrightScope/ICI [Investment Company Institute] Defined Contribution Plan Profile: A Close Look at 401(k) Plans, 2016.”

The use of index funds by plans in the BrightScope Defined Contribution Plan Database increased from 79% of plans and 16.7% of assets in 2006 to 91.3% of plans and 33.2% of assets in 2016. More than 95% of 401(k) plans with more than $10 million in plan assets offered index funds in their plan lineups in 2016, and 77% of 401(k) plans with less than $1 million offered them.

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Mutual funds were the most common investment vehicle in large 401(k) plans in the BrightScope database, representing 45% of assets in 2016. Mutual funds were a smaller share of assets in the largest 401(k) plans in the sample, accounting for between half and slightly more than three-quarters of assets in plans with less than $1 billion in plan assets but one-quarter of assets in plans with more than $1 billion in plan assets. Collective investment trusts (CITs) accounted for an additional 28% of assets, overall, followed by guaranteed investment contracts (GICs) at 9% and separate accounts, with 4% of assets.

CITs accounted for a larger share of assets in larger plans, while separate accounts were responsible for a larger share of assets in smaller plans. CITs held about 5% of assets in 401(k) plans with $100 million or less in plan assets, compared with 43% in plans with more than $1 billion. Conversely, separate accounts held 34% of assets in 401(k) plans with less than $1 million in plan assets, compared with 1% of assets in plans with more than $1 billion.

Retirement plan sponsors have been facing excessive fee lawsuits for years, which could explain why retirement plan fees ranked as the most likely primary area of focus over the next 12 months among the 106 defined contribution (DC) plan sponsors that participated in Callan’s 2019 Defined Contribution Trends Survey.

ICI has found a downward trend in the expense ratios that 401(k) plan participants incur for investing in mutual funds, which has been continuing for years. The BrightScope/ICI report says BrightScope has found the same in its database. According to the report, index mutual funds, which tend to be domestic equity index mutual funds, typically had lower expense ratios than other fund types. For example, the asset-weighted average expense ratio for index mutual funds in 401(k) plans was 0.09% of assets in 2016, compared with 0.46% of assets for domestic equity mutual funds including both index and actively managed funds.

CITs are also less expensive than mutual funds overall.
Compliance June 21, 2019

An Important Point About Form CRS and SEC’s Reg BI

Under the SEC’s final regulations, Form CRS requires less prescribed wording relative to the proposed version, meaning firms may generally use their own wording to address required topics and will have more flexibility to provide information to investors.

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In written commentary provided to PLANADVISER, Herb Perone, vice president of communications and marketing for the Investment Adviser Association, emphasizes that, contrary to some recent financial industry press reports, advisers are in fact permitted to use the word “fiduciary” in their SEC-required disclosures, including in the new Form CRS.

Earlier this month, the U.S. Securities and Exchange Commission (SEC) voted in favor of adopting a final amended version of the Regulation Best Interest rulemaking package. In addition to Regulation Best Interest itself, the Commission voted to approve an updated interpretation of the fiduciary duty prescribed by the Adviser’s Act, as well as a new required disclosure form called the Customer Relationship Summary Form, or Form CRS.

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According to Perone, there has been some confusion about what the final Form CRS requires, stressing that advisers are permitted to use the word “fiduciary” in their disclosures, including new Form CRS, “contrary to recent press reports that seem to imply otherwise.” According to Perone, the Investment Adviser Association received this confirmation directly from senior staff in the SEC’s Division of Investment Management.

“The final instructions to Form CRS require investment advisers, broker/dealers, and dual-registrants to include a brief statement of the applicable standard of conduct,” Perone explains. “Firms are required to use the exact language specified in the form’s instructions, which does not include the word ‘fiduciary.’”

According to the adopting release, the final language around Form CRS was modified from the proposal in an effort to use “simplified wording that is short, plain language … but still describes the key components of a broker/dealer’s or investment adviser’s standard of conduct when providing recommendations or advice.”

As Perone explains, the SEC opted to focus on the term “best interest” in Form CRS, and eliminated the word “fiduciary” from the prescribed statement to be provided by advisers.

However, as noted in the adopting release and now confirmed by SEC staff, final Form CRS requires less prescribed wording overall, so that firms may generally use their own wording to address required topics and will have more flexibility to provide accurate information to investors. Accordingly, Perone says, advisers may still use the term “fiduciary” in Form CRS to further elaborate on the duties owed to their clients, for example, when discussing their conflicts of interest.

Registered advisers will have from May 1, 2020, until June 30, 2020, to file their initial Form CRS with the SEC.

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