LAKE WORTH, Fla. -- A greater percentage of companies with more than $100 million in their 401(k) plans preferred institutionally priced mutual funds over private funds, according to a recent survey by the market research firm Insight In Formation.
More than a third -- 36.8% -- of the close to 100 companies queried preferred mutual funds, compared with 3.9% for private funds. More than half, 52.6%, preferred both; 6.6% wanted neither. For purposes of the poll, institutionally priced mutual funds were defined as those paying about 50 basis points or anything less than 1% of the fund assets annually.
"I think the shocking thing was the overwhelming preference for institutional mutual funds," said Fred D. Barstein, managing director of Insight In Formation.
In fact, 60.7% of the sponsors already offer institutionally priced mutual funds; 29.8% offer private funds, the survey revealed.
Insight's study is the last contribution in a growing industry discussion comparing the management fees paid by companies offering traditional defined benefit plans and the fees paid by 401(k) participants. Insight's study is consistent with one released in April by the Spectrem Group of Windsor, Conn., that indicated more defined contribution plans are using lower priced funds and shifting toward institutionalization.
These studies are providing evidence of what many in the industry who have noticed the so-called "db-ization" of defined contribution plans have suspected: Now that record-keeping fees have become standardized, plan sponsors are looking more keenly at management fees, Mr. Barstein said.
According to Insight's survey, 54.5% of companies polled would offer institutionally priced mutual funds along with privately managed funds. Before the poll, Mr. Barstein said, the common theory was that institutionally priced mutual funds and private funds slowly were becoming more popular with companies that have 401(k) plans of more than $100 million.
"Conversations were that this is coming; but it's already here," Mr. Barstein said.
Company executives who would comment said they preferred mutual funds because participants can check the price in the newspaper, Mr. Barstein said. But this is just part of the story, he added.
Plan participants place more trust in publicly listed funds where the employer cannot influence the investment decisions, Mr. Barstein said. The companies, for their part, want as many participants to invest as much as money possible in their plans.
"I was not surprised that they preferred mutual funds, but that they preferred them by a huge percentage," Mr. Barstein said.
While 52.6% preferred both types of funds, Mr. Barstein said it is clear to him that companies would rather provide mutual funds for their employees if they are similarly priced.
David L. Wray, president of the Chicago-based Profit Sharing/ 401(k) Council of America, said, "It's an issue of trust and overcoming that lack of trust and fear in a lot of employees. This (a mutual fund) is really something you can track . . . When you go to a privately managed fund, you lose it."
Still, it is practically axiomatic that companies with larger 401(k) plans will have an easier time negotiating institutional and other favorable rates, Mr. Wray said.
"Small companies do not have the economies of scale to get the management fees large companies can get," he said. "Large companies can get high-quality management, but if you walk in with $250,000, no one will manage that money for you."
In a lot of cases, the choice of using a professional manager does not exist, he said.
"But the market is very competitive and fees are coming down," he said.
Since such a large percentage of firms already offer lower cost private funds and institutionally priced -- rather than retail -- mutual funds, Mr. Barstein said, the trend toward seeking lower management fees is starting to travel downstream to firms with 401(k) plans of between $50 million and $100 million in assets.
Of the six companies with 401(k) plans of less than $100 million in assets included in the poll, two had institutionally priced mutual funds and three preferred mutual funds over private funds.
"They're going to their fund managers saying that they want to be charged institutional and not retail prices," Mr. Barstein said.
Nevertheless, only one-third of the companies surveyed said they would switch if they could save money, he said. According to the survey, 33.9% would substitute a mutual fund while 30.6% would switch for private funds. The majority would not change plans in order to get a more favorable rate on management fees, he added.
This is the case even though the difference can be as high as 100 basis points, Mr. Barstein said.
"It highlights the problem: companies are buying the service but they are not paying for it," he said.
Of the small companies, only one would switch to get a better price on management fees, he said.
However, the study acknowledged, not everyone understood the question about switching providers. Many thought that if they already had private funds, there was no need to change to another type of fund, the poll indicated.
Changing a service provider is difficult, time-consuming and expensive, Mr. Wray said. He added it was not surprising that plan sponsors would be loath to change plans, even for a more favorable management fee arrangement.
Mr. Barstein attributes the slow realization among plan sponsors that management fees should be a factor in selecting plans to the fact the rapidly growing 401(k) industry is still in its infancy. In 1996, around $650 billion was invested in 401(k) plans, whereas today that number is hovering near $1.5 trillion, Mr. Barstein said.
"It is because of the growth of the number of plans," he said.