The move to passive or index funds in larger defined contribution (DC) plans continues according to a P&I report finally overtaking actively managed investments driven by the desire for lower costs and the fear of lawsuits. Smaller plans are experiencing similar shifts although perhaps not as quickly as with larger plans which have major implications on how these plans are managed.
In 2015, passive investments accounted for 51.8% of plan assets for the 100 largest DC plans up from 48.5% in 2014 and 45.3% in 2013. There’s also a dramatic shift away from mutual funds to collective trusts (CITs) also driven by costs and the desire for more passive investing. In the past, smaller plans could not access CITs because of minimum investment requirements but large advisor groups like Fisher Investments, CAPTRUST, NFP and GRP are making them available to clients by pooling plans.
Though target date funds (TDFs) continue to grow as the most common default option garnering a significant percentage of new assets, domestic equities are still the largest investments in the top 100 DC plans followed by company stock, stable value and fixed income. Vanguard is the largest DC money manager for these 100 plans followed by BlackRock, SSGA and Fidelity.
Fees are the only certainty in investing which is why so many DC plans and individual investors are attracted to them but DC plans also believe it is a hedge against lawsuits. But most excessive fee lawsuits are based on revenue sharing not the cost of the investment so the move to index funds is not an absolute protection.
Many passive funds do not include revenue sharing within their expense ratio which will mean that DC plan sponsors will have to pay providers out of pocket or deduct expenses directly from participant accounts.
And while it’s hard to predict which active managers will beat their respective index, data shows that over multiple market cycles certain fund families perform well providing greater returns for investors. Some experts believe that asset allocation is more important heralded by the move to TDFs and managed accounts.
More and more money is moving into passive TDFs but because of their active glide path, there is no such thing as a passive TDF although the underlying investments may include index funds.
With the markets booming, passive investments seem attractive making it hard to pay extra fees to active managers but as markets normalize, those active managers that weather the storm will become more attractive.
