Fees took center stage — actually multiple stages — at Pensions & Investments' East Coast Defined Contribution Conference March 13-15 in Miami. One theme common to several sessions was fees are characterized by shades of financial gray: it's too simplistic to describe higher fees as always bad and lower fees as automatically good.
Fees for wrap contracts, which protect stable value funds against volatile interest rates and guarantee that participants will receive the funds' book value, have been rising during the past few years, settling around 20 basis points. That, along with more conservative investment policies required by wrap providers, “will make the environment healthier,” said Matthew Gnabasik, managing director of consultant Blue Prairie Group, Chicago.
Just a few years ago, wrap fees were in the high single digits, and some providers began exiting the wrap market or curtailing their business, thus causing a capacity shortage.
Now, more wrap contracts are being written and some providers have entered or will enter the business, Mr. Gnabasik said. “In the short term, it's painful (for DC plans and their participants), but longer term, it bodes well for the industry,” he said.
Karl Tourville, managing partner of Galliard Capital Management Inc., Minneapolis, said even though higher fees and more conservative policies such as holding shorter-duration bonds will trim some yields, stable value remains a better investment than money market funds.
In another session, several panelists discussed the long-term impact of fee regulations from the Department of Labor.
Regulations affecting fee disclosure by plans to participants take effect Nov. 1. Implementation of regulations on service providers' disclosure to plans was delayed until Jan. 1. More Labor Department guidance and the final rules are expected in late spring.
Although some critics of fee-disclosure regulations worry that participants will use the information to select the lowest-fee funds without regard to asset allocation or individual needs, Keith Overly told panelists he hasn't seen a rush to low-fee index funds at the Ohio Deferred Compensation Program, Columbus, where he is executive director.
“We do not experience the fear that people will rush to low fees as the only indicator,” said Mr. Overly, noting his $8.4 billion plan is not subject to ERISA regulations. “I hope they would look at their fees but also at their allocations.”
Eric Levy, vice president and head of defined contribution products at Lincoln Financial Group, Radnor, Pa., said he is concerned that the additional fee-disclosure rules could cause information overload. “We are going to throw a lot of information at participants,” he said. “How are people going to react?”
Mr. Levy said clients have been asking Lincoln Financial whether the new rules will encourage participants to shift investments more heavily into low-fee index funds and whether participants will make “radical” changes in their investing behavior.
Fee regulations are just part of a “crowded” regulatory calendar this year, said James M. Delaplane Jr., a partner at Davis & Harman LLP, Washington, and a keynote speaker at the conference. The legislative calendar, by contrast, “looks relatively quiet,” he said.
Some key regulatory issues will be the final DOL rules on provider-to-plan fee disclosure, which Mr. Delaplane predicted will contain “some substantive changes” from the original proposal, and the hotly debated proposed rule redefining a “fiduciary,” which he characterized as “momentous” and “complicated.”
Two other keynote speakers offered a global view of investing and retirement policies and practices.
Richard Turnill, the London-based managing director and head of global equity for BlackRock Inc., offered encouragement that, in the aggregate, a global bull market is continuing, albeit at a modest pace. The bull market will end when corporate earnings hit their peak, but “global earnings look sustainable now,” he said.
Mr. Turnill said he is encouraged by trends in hiring, mergers and acquisitions, stock buybacks and dividend increases. “I pay more attention to what companies do than what they say,” he explained.
Mr. Turnill's investment prescription includes a focus on dividend yields and dividend growth. Dividends, he said, are a sign of strength and financial health, and companies that have pricing power will be able to raise their dividends when inflation rises.
Although the U.S. and Canada have more than half of the world's defined contribution assets, other continents will experience greater growth in DC assets as employers substitute defined contribution plans for defined benefit plans and governments cut public pensions, said Juan Yermo, head of the private pensions unit for the Organization for Economic Cooperation and Development, Paris.
Mr. Yermo said other countries' concerns about DC plans should sound familiar to a U.S audience: how to overcome insufficient contributions; how to cope with uncertainty of benefits; how to measure and control fees; and how to make sure participants have choices and understand their investment options.
