Callan: DC plans dumping managers for performance

Defined contribution plan executives are firing more underperforming managers and/or funds than in recent years, according to the latest annual survey of DC plans by Callan Associates.

The 2013 Defined Contribution Trends survey, released Monday, said 40.7% of plans dropped managers and/or funds last year, compared with 31.5% in 2011 and 25% in 2010.

“Plan sponsors have been more willing to pull the trigger on managers that underperform,” Lori Lucas, executive vice president and defined contribution practice leader, said in an interview. “And they are more comfortable mapping assets out of underperformers than they have in the past. This is part of a trend of greater governance controls that we're seeing generally in DC plans.”

Domestic large-cap equity fund managers were the most often replaced in 2012 — as was the case in 2011, the survey found. Among respondents, 62.5% said they replaced a domestic large-cap equity fund manager last year. Thirty percent of plan executives said they replaced international equity funds. On average, plans replaced two fund managers last year, although one unidentified DC plan replaced six, a report on the survey said.

The survey also found plans are decreasing their reliance on record keepers' target-date and target-risk investment options. It said 53.6% of plans used record keepers' proprietary mutual funds or collective trusts for target-date or target-risk options last year, down from 58.7% in 2011 and 69.8% in 2010.

“We expect to see more and more plan sponsors venturing out beyond the target-date fund of their record keeper as they seek to better tailor their target-date fund to their plan needs,” Ms. Lucas said.

She forecast plans continuing to increase their use of passively managed target-date funds because sponsors “are very sensitive about fees.” In the latest survey, 38.1% of plans offered only passively managed target-date funds vs. 22.6% in 2011 and 25.4% in 2010.

The percentage of plans offering only actively managed target-date funds continued to fall – to 36.5% last year from 45.3% in 2011 and 53.3% in 2010. The percentage of plans offering a mixture of active and passive target-date funds was 25.4% last year vs. 32.2% in 2011 and 22.2% in 2010.

The Callan survey, conducted online in September and October, featured responses from 103 plan executives. Three-fourths of the respondents were executives at 401(k) plans, and the others were from DC plans such as 403(b) and 457 plans. Among respondents, 35.7% were from plans with assets of more than $1 billion while 50.9% had assets between $100 million and $1 billion.