According to Jason Brafman, director at John Hancock Investments, defined contribution (DC) retirement plan sponsors continue to pare back their investment menus in the interest of making it easier for participants to build rational allocations.
Brafman spoke on a panel with Vincent Smith, partner and senior consultant at Fiduciary Investment Advisors, during the Best of PSNC 2018 event in Boston. Kerrie Casey, retirement plan consultant with SageView, moderated the discussion.
“The pendulum is still swinging back toward smaller fund lineups,” Brafman said. “The reason is because we know much more about analysis paralysis these days, and the popularity of offering an asset-allocation solution as the qualified default investment alternative [QDIAs] makes having a large number of funds unnecessary, frankly, and even potentially harmful for participant performance.”
Smith agreed, but noted that the core menu remains an important part of the retirement plan investment lineup. He said plan sponsors are learning to do more with less.
“We see plan sponsors transitioning away from, say, offering multiple dedicated mid-cap and small-cap managers,” Smith said. “Instead plans will offer a consolidated fund with both of these in one package. The same is true for emerging markets, large-cap U.S. equities, and several other asset classes.”
As Brafman and Smith pointed out, diversification remains incredibly important, but simplifying the fund menu is a win-win for participants and sponsors. Participants can more easily build effective portfolios, while sponsors reduce their reporting and monitoring burden.
Active versus passive debate, recordkeeping fees
Brafman next addressed the “chicken and egg” argument surrounding the use of active versus passive funds, noting that he personally sees a place for both investment approaches on the same plan menu.
“Today many experts will tell you that it is about using active management where the opportunities are greater than the additional cost, and then using passive management where markets are more efficient and alpha is harder to achieve,” Brafman said. “So, for example, large-cap U.S. equity may not make sense for active management on a long-term DC plan menu. But it could make sense to offer a dedicated emerging market fund; that’s one place where active managers can shine.”
Smith said another important point is to make sure plan participants don’t think their funds or account administration is free, whether they are using active or passive management.
“It is the responsibility of providers and sponsors to be transparent about how fees are being assessed, why they are being assessed this way, and what the exact terms of that structure are,” Smith said.
Both panelists agreed there is still a debate going on about the use of revenue sharing. In particular, plan sponsors are debating whether simply declaring no revenue sharing is better in the name of simplicity and transparency, or whether it is still worthwhile to work with a recordkeeper and create efficiencies through proprietary investment revenue sharing on a net cost basis.
“Often you can get a cheaper all-in cost by using revenue sharing, but the other side of the coin is that this can be very confusing for participants, and for that reason alone it may be better to go with zero revenue sharing, unless you can really educate the plan population and get everyone to realize what is really going on,” Brafman said. “That’s where the trend away from revenue sharing is coming from.”
According to the panel, most plan sponsors today are favoring paying up front a flat dollar fee for recordkeeping, but both agreed this is also not always the best way to pay, especially for smaller plans.
“Plan sponsors want to know how they should address the ‘fee-leveling’ conversation with participants,” Smith said. “This will remain an important conversation to have with advisers and providers.”