They stand at different ends of the investing spectrum, but Jake Gilliam and Brian Jacobs are both adept at telling the story of falling fees that has, in many respects, redefined the 401(k) industry after the passage of strengthened fee disclosure under the Employee Retirement Income Security Act (ERISA).
Gilliam is a senior portfolio manager at Charles Schwab Investment Management—one of the nation’s largest institutional asset managers, with products including money market funds, index funds, exchange-traded funds (ETFs), sub-advised funds, asset allocation funds and disciplined active funds. Jacobs is president at Direxion, a $9 billion investment boutique that is one of only three fund providers in the U.S. with Securities and Exchange Commission (SEC) clearance to offer “levered” ETFs—which make up a majority of the firm’s assets under management (AUM).
Despite significant differences in investment approach and organizational structure, both Jacobs and Gilliam tell PLANADVISER their work continues to be redefined by demands for better fees from all types of clients—retirement and retail, institutional and individual. For retirement plan clients in particular, the combination of increased regulatory pressure and plan participant scrutiny has forced plan sponsors and their provider partners to push fees lower, both in the interest of improving outcomes and combating litigation risk.
For Jacobs, the low-fee future will be one dominated by ETFs. Admitting the funds currently hold only a fraction of total 401(k) assets, he says the efficiency and transparency of ETFs still stand a good chance of disrupting an industry long contented with mutual funds, provided current technology hurdles are overcome.
“There is so much more information and interest out there now about ETFs than there ever was before,” Jacobs says. “The latest reports show ETFs just crossed $2 trillion dollars across all the various investing channels. From our perspective, this is really exciting. We’re seeing a convergence between the mutual-fund and the ETF world[s], and I think the end result will be positive for most investors.”
Jacobs says there is significant industry innovation occurring as providers that have long been engaged in the active mutual fund space start launching inexpensive ETF strategies, often seeking to mirror different elements of active management at better price points. Even more interesting, some recently established ETF providers are coming out with low-fee mutual funds to compete with the big industry names. All of this spells opportunity for plan sponsors to find a better deal on investment fees, he says, but more options can bring a more challenging decisionmaking process.
“It’s a really fast-changing environment out there,” Jacobs says. “The talk of the town in the retirement space is always making sure fees are reasonable, so that’s why I think you’re starting to see this blending of active and passive. The use of these types of products among retirement specialist advisers is still far from the norm, but we’re hopeful the development will continue.”
Jacobs notes that his firm’s ETFs are already offered to individual retirement investors through the Schwab ETF OneSource platform. Direct, in-plan access to ETF investments remains elusive, however, as many recordkeeping platforms lack the capability of hosting the funds. One way around this limitation, Jacobs says, is when the plan has a brokerage account window feature. He also remains hopeful that the course of financial technology innovation will make recordkeeping platforms more receptive to ETFs and other fund structures.
Gilliam agrees that more retirement industry attention is fixed on ETFs, but he sees the low-fee future playing out somewhat differently. He recently penned a column for PLANADVISER describing the impressive fee-reduction potential that can come along with unbundling target-date funds (TDFs) and using open-architecture investment lineups in a 401(k) plan.
“When plan sponsors elect to go custom and work with an adviser to establish an open-architecture investment lineup, we see an ability to negotiate much better fees for the underlying strategies that are ultimately offered to participants,” Gilliam says. “This is especially true when you get into the large and mega segments of the plan sponsor market.”
Gilliam adds that smaller plans will have more trouble aggressively negotiating down their fees, and some may find they do not have sufficient scale or resources to make going custom or open architecture palatable.
“It’s fairly exclusive right now, for the large and mega plans, to get the better pricing due to their size,” he says. “That’s somewhere advisers may be able to help the small-plan clients—working in this market to look at fees, look at the underlying menu construction, and if the plan sponsor can’t go custom for TDFs, the adviser can help them shop around and get something proprietary but still low fee. Those products already exist in the marketplace today.”
One area of agreement for Jacobs and Gilliam is that investment providers that can offer outcome-specific portfolio solutions at a reasonable price will excel in serving ERISA clients.
“People need portfolios to solve for higher-income demands in retirement, for example, while carrying lower tail risk due to the dangers of investment loss in the years after you stop making contributions,” Jacobs says. “Many of these people are thinking, ‘I hope I live another 30 years, so I know I need to have exposure to the equity market, but I don’t want to outlive my money’—that’s the challenge.”