IRVING, Texas - Exxon Mobil Corp.'s $14 billion 401(k) plans are dumping active investment management.
The company, formed through the merger of Exxon Corp. and Mobil Corp. in 1999, will go to an almost 100% indexed format when it merges the predecessor plans in mid-2003.
The new format will affect participants in the roughly $4.6 billion Heritage Mobil plan, who now can invest in several actively managed investment portfolios. Participants in the Exxon 401(k) plan already have been almost exclusively in passive options, with the exception of company stock, which will be retained in the merged plan, confirmed an Exxon Mobil official who did not wish to be identified. Two index funds - international equity and domestic bonds - will be added to the four now offered in the Exxon plan.
The decision to adopt a passive investment format is uncommon, investment consultants say. The strategy might find favor among some large corporations "where the plan sponsor is doing whatever they can to squeeze the expense ratios down to as low as possible and they believe there is very little benefit from active management," said Michael Weddell, a consultant in the Southfield, Mich., office of Watson Wyatt Worldwide.
Kathy Taylor, managing director for U.S. institutional business at Barclays Global Investors in San Francisco, a huge index fund manager that runs about $2 billion in Exxon Mobil 401(k) assets, said none of its other corporate 401(k) clients has adopted a pure passive strategy. BGI will be the sole manager for the combined defined contribution plan, excluding the company stock and an internally managed passive bond option.
"We're really not trying to take away anything, but give Mobil employees a better deal because we believe the index funds, on average, will outperform active funds because of fees," the Exxon Mobil official said.
Faith in indexing
The company's faith in indexing as a low-cost, low-risk investment management style is laid out in a recent internal company document. "Even if active managers outperform the market in one year, there is no indication of what will happen in future years," the company wrote to participants in a newsletter detailing the changes.
What's more, former Mobil employees also stand to save money. Under the old approach, Mobil participants paid for record keeping from Merrill Lynch & Co., the bundled service provider for the Heritage Mobil plan. Under the new plan, Exxon Mobil - which already handles record keeping for the Exxon retirement plan - will do the record keeping for the combined plan, and pick up the tab as well.
Exxon Mobil's move to passive investment management for the combined 401(k) plan mirrors its philosophy in managing its defined benefit plan assets, where its domestic equity exposure is entirely indexed, Mr. Samson confirmed. The oil producer had 43% of its more than $5 billion in pension assets in domestic equities last year, according to Pensions & Investments' annual survey (P&I, Jan. 21).
When the Exxon and Mobil plans are combined next year, participants will be able to invest their retirement money in seven investment options: an S&P 500 index fund; a Wilshire 5000 index fund; a developed international markets index fund; a Lehman Brothers Aggregate bond index fund; a balanced fund, which will be invested in the offered equity and bond funds; company stock; and the internally managed passive short-term bond fund.
10 fund options
Mobil participants currently can invest their retirement money in any of 10 actively managed funds, as well as company stock. The funds are: the AIM Charter Fund; the Jennison Equity Fund; MFS Emerging Growth Fund; Templeton Developing Markets and Foreign funds; Franklin U.S. Government Securities Fund; and Merrill Lynch Floating Rate Long Term Fixed Income, Equity Index Trust, Institutional Fund and Global Allocation funds.
The changes mean Mobil participants will lose exposure to the Jennison fund, a top-performing equity fund, and also to foreign emerging markets and GIC investments.
In the in-house newsletter, the company discussed the loss of the investment choices. "For many participants, Jennison Equity, as the largest actively managed fund among your current investment choices, may be a source of particular concern."
But the company noted that over the past decade, the performance of the Jennison fund and the S&P 500 were similar, but the S&P 500 had lower risk. The Jennison fund returned a compound annualized 13.4% in the 10 years ended June 30, and the S&P 500 logged 12.9% over the period.
Also, because of the nature of emerging stock markets, it is difficult to package them into an index fund, the Exxon Mobil official noted, "and we're committed to indexing." Moreover, emerging markets aren't necessarily an appropriate investment for 401(k) participants. "They're such a small part of global equities markets that they don't deserve such a large spot," the source said.