PIMCO survey says DC plan revenue sharing fading

A survey of consultants serving defined contribution plans with $2.4 trillion in combined assets offers an emphatic prediction that new federal fee-disclosure regulations will spur executives to reduce or drop revenue sharing.

The survey, to be released April 1 by Pacific Investment Management Co., also offers a broad and detailed pulse-taking of other key issues in the DC industry ranging from asset allocation to plan management.

“Clearly, plans are moving to mutual funds with zero revenue sharing and to collective investment trusts with zero revenue sharing,” said Stacy Schaus, executive vice president and defined contribution practice leader of Newport Beach, Calif.-based PIMCO, in an interview. “We believe this trend will continue.”

When asked about the impact of regulations requiring fee disclosure to plan sponsors by providers, 85% of consultants said they expect an increase in the use of mutual funds with zero revenue sharing.

In addition, 81% of consultants said they expected an increase in the use of collective investment trusts, and 53% predicted a greater use of separate accounts to reduce the impact of revenue sharing.

The larger the plan, the more likely it will use a separate account, Ms. Schaus said. Although the survey didn't ask consultants about the asset size of DC plans seeking to reduce or eliminate revenue sharing, Ms. Schaus said the largest plans are leading the way, but other big plans are also taking action to reduce or eliminate revenue-sharing.

Consultants also predicted a big drop in sponsors' use of high-revenue-sharing mutual funds, the survey said.

Ninety percent forecast a decrease or a significant decrease in sponsors offering mutual funds whose revenue sharing exceeded 25 basis points. Some 68% predicted a decrease or a significant decrease in sponsors' use of mutual funds with revenue-sharing costs of 10 basis points to 25 basis points.

Fee-disclosure regulations also play a role in guiding the biggest source of business growth for consultants, Ms. Schaus said. When asked which services had grown the most over the past year, 67% of consultants cited total plan cost or fee studies, 51% identified record-keeping searches and 43% referenced investment design.

Although these growth sources also were cited most often in the two previous annual PIMCO surveys, Ms. Schaus said the latest answers “were definitely related” to fee disclosure rules and to litigation.

“Sponsors are hiring consultants to evaluate fees,” she said. “This goes hand in hand with the fee-disclosure regulations that raised their awareness.”

The PIMCO survey also revealed considerable discomfort among consultants about the use of capital preservation options over the next several years. “We know capital preservation is challenged now due to the low (interest) rate environment,” Ms. Schaus said.

For example, 84% of consultants said they were concerned or very concerned about money market funds producing nominal or negative returns because of low interest rates. Also, 61% worried about potential new regulations such as establishing a floating net asset value for money market funds.

If new net asset regulations are approved, the survey said the likely or most likely response by plan executives (48%) would be to keep the money market fund. The next choice (41%) would be replacing the money market fund with stable value.

However, consultants also fretted about stable value, with 80% concerned or very concerned about wrap fees and wrap capacity — the cost and availability of the insurance that guarantees the book value of the underlying investments. In addition, 76% said they were concerned or very concerned about stable value funds being closed to new DC clients or being liquidated.

The survey noted that consultants have changed their views about what asset class or strategy would be a valuable addition to a plan's investment lineup.

Emerging market debt was the top choice, cited by 61% of consultants. Second was commodities (49%), followed by risk-mitigation strategies such as tail-risk hedging (45%), high-yield fixed-income securities (39%) and real estate investment trusts (35%).

In the previous two surveys, the leading choices were Treasury-inflation protected securities, emerging markets equity and commodities. In the current survey, TIPS ranked ninth with 29%. “TIPS is no longer new,” Ms. Schaus said.

Among market risk-mitigation strategies, the most popular choice for consultants — according to 81% of respondents — was the use of inflation-protection strategies such as TIPS, commodities and REITs, the survey said.

Consultants also said the largest DC plans are most likely to seek a target-date fund separate from the one offered by their record keeper. For plans with more than $1 billion in assets, 89% of consultants forecast a “decoupling” of the target-date funds to a “significant extent.” For plans with assets between $500 million and $1 billion, 79% of consultants predicted a decoupling to a “significant extent.”

Among the survey's other findings, consultants said:

cGlidepath structure, quality of underlying investments, diversification of underlying investments and fees were the most important factors in selecting default strategies. Performance placed 10th. “The real story is risk management,” Ms. Schaus said.

cA core lineup of both active and passive funds was recommended by 94% of respondents, while only 22% advocated a passive-only core lineup and 14% recommended an active-only core lineup.

cThe biggest factors that might cause a greater interest in passive investment in DC plans are lower costs (98%), fear of fee litigation or other legal concerns (76%) and a perceived reduction of fiduciary risk (54%).