According to Callan’s 2016 Defined Contribution Trends Survey, 68.4% of plans now use a mix of active and passive funds; 18.8% utilize an active/passive mirror approach—offering both options for each asset class; 4.3% offer all active funds; and 3.4% have all passive funds.
Callan also found that 42.5% of plans use indexed target-date funds (TDFs). “Often, even plan sponsors that are holding onto some active funds in their core menu feel it is best to offer the lowest-cost target-date fund available,” Lucas says. “They are so concerned about low costs that they will offer completely passive target-date funds.”Story Continued
Use of passive options in 401(k) plans continues growing, but not necessarily for the right reasons, Cohen says. “It’s an outgrowth of the focus on fees. Fees are important, but this focus has caused some sponsors to say, ‘We are going to go with the lowest-fee options possible,’ instead of focusing on what ERISA [Employee Retirement Income Security Act] requires them to focus on, which is getting appropriate value for the fees,” he says. “They are not thinking about the fact that fees and value don’t necessarily equate.”
Cohen hopes to see sponsors start thinking more about value received for investment fees. “Many plan sponsors had knee-jerk reactions to fee issues, and I think more sponsors will take a step back and have conversations about the fee trade-offs,” he says. “More will ask, ‘When does it really make sense to use passive options?’ Then we will see the pendulum start to move back,” toward active management.