Success in this area requires plan sponsors not only be able to justify the goings-on of their plans, but also being able to explain that issue to their participants – and they should try to develop their means of communication as the anticipated new Department of Labor regulations are likely to mandate more transparency.
Panelists at PLANSPONSOR’s 2009 Future of Asset Allocated Funds (FAAF) Conference East discussed these issues as well as how plan sponsors can know what costs are “reasonable” for them.
Paul Powell, Managing Director at 401kAdvisors, described how the Pension Protection Act of 2006 (PPA) changed the lives of participants; much of their money is now invested differently than it likely would have been before the development of qualified default investment alternatives (QDIAs). Money managers are now gathering assets they would not have previously, and the stable value industry has certainly been affected by these changes. With the advent of the QDIA, even more investments are going to land in asset allocation target-date funds, he said, even as new target-date offerings continue to come online. Powell encouraged plan sponsors to ask what the funds’ revenue requirement was, and how they would divide that up: who pays how much and for what?
How Big a Component?
Phil Senderowitz, Chief Investment Officer at Chepenik Financial, said that one thing to consider when looking at the fees and revenue-sharing with respect to target-date funds is how big a component of your plan that target-date fund investment would be. Would it be added to an existing plan as an additional investment option? Would it be the basis of a new plan portfolio? Senderowitz urged plan sponsors to pay close attention to their fees and the revenue they generate to make sure there is enough to run the plan. Investment managers have not seen much fee compression as yet, and the expense ratio on most funds has not gone down very much at all, he said. Regarding overall expense ratios, he said, money is being drawn from the administrative side, not the investment management side of the house.
When evaluating these fees, Senderowitz emphasized the importance of comparing like funds. An asset allocation fund made up entirely of proprietary funds is likely to have a significantly lower expense ratio than a multi-manager solution that utilizes external consultants. When looking at a plan, if you are trying to start from scratch, he recommended starting anew, looking into existing target-date or asset-allocation solutions, and using that information as a guide to find the right provider for your plan and your participants.
Steven Charlton, Director of Consulting Services at NEPC, LLC, discussed important factors to consider when evaluating the reasonableness of a product:
- Is the fund providing value over and above the fee that is being charged relative to a passive benchmark?
- Is it performing better than its peer group?
Charlton said it was important to recognize that the revenue-sharing lawsuits brought thus far are generally concerned with what assets were purchased, whether they should have been bought at a lower cost, or if there were not less expensive share classes available.
Plan sponsors are understandably very sensitive to this issue of having very low fees in order to get protection or avoid lawsuits, so while most investment managers in the defined benefit space have been able to defend and maintain their level of fees, that kind of relationship might not hold in for defined contribution programs. Meeting basic requirements of reasonableness - comparing net fees and returns against a benchmark - can go a long way to satisfy a plan sponsor's fiduciary duty, he said, but you still have to find a good product, he said.
- Sara Kelly
Your Money's Worth-Now, How Much Should You Pay?
Plan sponsors are increasingly focused on fees-sensitive both to their impact on net returns, and on the implications of a regulatory emphasis on fuller participant disclosure. Knowing how much you're paying, knowing when that is "reasonable"-and communicating.
Moderator:Fred A. Schneyer , Senior Editor, PLANSPONSOR
Paul L. Powell
Phil Senderowitz , Chief Investment Officer, Chepenik Financial
Steven F. Charlton , Director of Consulting Services, NEPC, LLC
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