How Investment Decision-Making is Altered by the Evolving Fee Landscape

Transcription

1 How Investment Decision-Making is Altered by the Evolving Fee Landscape Moderator: Diane Vallerie Improta, Managing Director, Rocaton Investment Advisors Speakers: Jaime Erickson, Executive Director, Retirement Benefits Plans, Comcast/NBCUniversal Richard McHugh, Partner, Porter Wright Morris & Arthur Thomas Woodruff, Director Healthcare Policy & Benefit, CT State Comptroller Ross Bremen, Partner, NEPC 1

2 Improving Participant Outcomes 30% of respondents identify fees as a way to help improve retirement plan accumulations. Many plan sponsors are focused on: Lowering fees Restructuring the administrative fees so that they are assessed equitably Source: Rocaton/Pensions & Investments 2014 Survey of DC Industry Viewpoints 2

3 Understanding Fees Typically, DC Fees Investment Administrative Trust & Custody Revenue Sharing is a component of administration 3

4 Have you Attempted to Eliminate Revenue Sharing? 1.) Yes 2.) No 3.) Don t know Special thanks to our diamond sponsor: 4

5 Revenue Sharing On The Decline Almost two-thirds (64%) of respondents expect the use of revenue sharing by DC plans to decrease in the next two years. Nearly half indicated it is highly likely that money managers will create additional non-revenue sharing vehicles. Source: Rocaton/Pensions & Investments 2014 Survey of DC Industry Viewpoints 5

6 Different Levels of Revenue Sharing Is it a Problem? Over half (54%) of respondents feel that it s a problem if a DC plan s investment options have different levels of revenue sharing. Source: Rocaton/Pensions & Investments 2014 Survey of DC Industry Viewpoints 6

7 Will Recordkeepers Offer Mechanisms to Level Fees? Over 80% of respondents believe that recordkeepers will increasingly offer mechanisms to level plan fees. Some recordkeepers have solutions: Range of solutions varies Source: Rocaton/Pensions & Investments 2014 Survey of DC Industry Viewpoints 7

8 What Changes Have Been Made to the investment line-up that resulted in lower fees? 1.) Added more low cost index funds 2.) Moved to lower fee share classes/vehicles 3.) Eliminated funds 4.) Created private/white label funds 5.) Combination of some/all of the above 6.) None Special thanks to our diamond sponsor: 8

9 How do your participants pay for administration? 1.) Through revenue sharing 2.) Charged an explicit fee (fixed dollar/basis points) 3.) Combination of A & B 4.) Don t pay, plan sponsor pays 5.) Don t know Special thanks to our diamond sponsor: 9

10 Example - Administrative Fees Allocation Assets ($) Rev. Share/ Admin. Credit (bps) Rev. Share/ Admin. Credit ($) Participant A - $150,000 Large Cap Value Mutual Fund 60% $90,000 0 $0 Fixed Income Fund 40% $60,000 0 $0 Total Administrative Fees $0 Participant B - $150,000 Large Cap Growth Mutual Fund 60% $90, $135 Core Bond Mutual Fund 30% $45,000 8 $36 Government Money Market Fund 10% $15, $30 Total Administrative Fees $201 Administrative Fees Participant A = $0/yr Participant B - $201/yr Participant C - $150/yr Participant C - $150,000 Target Date Funds 100% $150, $150 Total Administrative Fees $150 10

11 What Does ERISA Have to Do With All of This? ERISA imposes pervasive responsibilities on folks who serve employee benefit plans in a fiduciary role (often not just plan sponsors) Those responsibilities revolve around a duty of loyalty and prudence (that clearly extends to plan investment and plan fee considerations) Relatively new fee disclosure requirements inherently are based on these responsibilities 11

12 Thresholds of Fiduciary Responsibilities? A plan fiduciary must act solely in the interest of plan participants for the exclusive purpose of providing plan benefits and for defraying the reasonable expenses of plan administration Duty of loyalty generally requires a fiduciary to set aside interests that may conflict with those of participants - including those of plan sponsor 12

13 Are You A Fiduciary? A fiduciary is anyone who has any discretionary authority or responsibility for the management or administration of the plan exercises any authority or control over management or disposition of plan assets provides investment advice to the plan for a fee or other consideration (direct or indirect) This is a functionality test-not a matter of title 13

14 Prudence is a Process! A fiduciary must act with the care, skill, prudence and diligence under the circumstances that a prudent person, acting in a like capacity and familiar with such matters would use in the conduct an enterprise of like character and with like aims Procedural prudence test places focus on decision process In retrospect, outcome may not be optimal It is crucial to adhere to established plan procedures and plan administrative structures Always appropriate to document the process applied Identify where you want to go and how to get there 14

15 You've got to be very careful if you don't know where you're going, because you might not get there. Yogi Berra Famed American Philosopher and Baseball Player 15

16 Lessons Learned From Current State of Plan Fee Litigation Nearly 40 lawsuits have been filed related to plan fees over recent years. Early lawsuits typically focused on plan sponsors and the use of revenue sharing payments. The focus of the lawsuits has expanded to cover other investment fund challenges (e.g., use of actively managed mutual funds, bundled service providers). Lawsuits also have been filed against service providers, alleging they serve in a fiduciary capacity. 16

17 Lessons Learned From Current State of Plan Fee Litigation Both plan sponsors and service providers are at risk, which adds greater need to scrutinize contractual arrangements. Few investment arrangements will be considered per se bad under ERISA, which makes both the review process and disclosure procedures vitally important. 17

18 Comcast Pre Transition Professionally Allocated Passive Funds Active Funds Target Retirement Date - Trusts Bond Index Collective Trust S&P 500 Index Mutual Fund Broad US Equity Index Mutual Fund Small Company Index Mutual Fund International Equity Index Mutual Fund Fixed Income Stable Value Fund Separate Account Core Plus Bond Fund Mutual Fund Premixed Balanced Mutual Fund Domestic Equity Large Cap Value Mutual Fund Large Cap Growth Mutual Fund Large Cap Growth Mutual Fund Smid Cap Value - Mutual Fund Small Cap Stock - Mutual Fund International & Global Equity International Equity - Mutual Fund Global Equity - Mutual Fund 17 Investment Funds No Tiering Name Recognition Combination of active and low cost passive funds Utilized Institutional Mutual Funds and Collective Trusts Rev. Sharing / Administrative Offsets Varied Company Stock 18

19 Comcast Post Transition Tier 1: Target Date Tier 2: Index Funds Tier 3: Actively Managed Funds Target Retirement Date Collective Trusts Bond Index Collective Trust S&P 500 Index Mutual Fund Small Company Index Mutual Fund International Equity Index Mutual Fund Stable Value Fund Separate Account Bond Fund 1 Manager Separate Account Large Cap Stock Fund 3 Managers Small/Mid Cap Stock Fund 3 Managers International Stock Fund 1 Manager 11 Funds Moved to Tier Structure to communicate to plan participants Reduced Collective Trust Fees Further Eliminated 1 Index Fund, Overlapping Eliminated Revenue Sharing almost everywhere Transitioned from Mutual Funds to Separate Account Created White Label Funds and Eliminated Revenue Sharing Company Stock 19

20 Comcast Retirement - Investment 401(k) Plan Post Transition = Elimination of Revenue Sharing October 1, 2012 Summary Removed 6 investment options, reducing line-up from 17 to 11 options Eliminated Revenue Sharing from all funds Reduced collective trust fees even further Unitized funds so revenue share component of the fund could be removed For funds with only 1 bp of revenue sharing, worked with fund managers to remove revenue share As a result of the elimination of revenue sharing, all participants pay a quarterly recordkeeping fee Total transparency with plan participants 20

21 Fee Benefit Based on the Plan mapping, investment fees drop by 8.6% This was partially offset by an increase in per participant charges and an increase in Trustee fees, due to complexity of administering Manager of Manager structures The net effect was a decrease in Total Fee of approximately 5.2% 21

22 Target and Custom Portfolios Model construction may favor index funds Correlations more predictable Underlying holdings known State of CT Plan Average Fee = 40 bps In Target Date Funds Avg. = bps In Custom Managed Portfolios Avg. = bps 22

23 Target Date Funds Have Grown Assets 23

24 Passive share in Target Date Has Grown 24

25 Guaranteed Living Benefits (GLB) in Plans May Add To Index Trend Risk managers want models to use indices Use of indices enables creation of time series Time Series important to stochastic modeling Underwriters more comfortable with known indices Index Funds help offset high wrap fees Fees = about 1% of assets Index funds keeps GLB fees more reasonable 25

26 Guaranteed Living Benefit (GLB) Assets Under Management $ Billion Q Source: LIMRA 26

27 Current environment requires plan sponsors to determine the color of their parachute (whatever color it may be) and to implement prudently - An insightful investment consultant 27

28 The Fee Environment Weighted average expense ratios have fallen from 0.57% in 2006 to 0.49% in 2014 Record Keeping fees have fallen from $118/participant to $70/participant A majority of plans are contracted in non-bundled record keeping arrangements A majority of plans have re-contracted since January 1, 2011 (80%) 85% of plans collect some level of revenue sharing The percentage of plan options that generate revenue sharing is down from last year (50% vs. 61%) Source: NEPC 2014 Defined Contribution Plan & Fee Survey 28

29 Record Keeping Contracting A majority of plans are contracted in non-bundled record keeping arrangements 46% Bundled (median 4,800 participants) 29% Fixed dollar per head (median 13,200 participants) 18% Fixed basis point (median 4,500 participants) 7% Other (median 7,200 participants) 69% of plans with no revenue sharing have greater than $1 billion in assets Source: NEPC 2014 Defined Contribution Plan & Fee Survey 29

30 Investments Numbers of plan options remain unchanged at 22 75% offer non-mutual fund vehicles 100% of plans offer at least one index fund 9% of plans are predominantly passive (more than half passive) 60% of target date funds are non-proprietary 26% of plans offer passive target date funds 14% of plans offer custom target date funds A handful of plans added passive core options or replaced active options with passive Source: NEPC 2014 Defined Contribution Plan & Fee Survey 30