Aon Hewitt claims new tool can keep a lid on fees

A new defined contribution plan tool introduced by Aon Hewitt this year could enable companies to compare fees before committing to new managers, while offering a selling platform that benefits investment-only DC firms.

Consultants, however, are uncertain whether the platform offers anything new or different.

Aon Hewitt is scheduled to announce its DC Nexus platform for defined contribution plans on Oct. 28. The platform is designed to provide the record keeper's clients, and their investment consultants, with a database of money managers' investment offerings and a dashboard showing relevant information, such as performance, fees and benchmarks. The goal is to streamline manager searches, monitoring and replacements. All participating managers are required to disclose fees.

The platform has data and information available from other sources, but is in one place with DC Nexus.

“There was a need in the marketplace for plan sponsors to get more transparency and consistency,” said Winfield Evens, a partner and director of outsourcing investment strategy at Aon Hewitt, Lincolnshire, Ill.

All money managers with at least $200 million in assets under management can sign up for free, but have to pay Aon Hewitt a distribution fee of three basis points annually for active strategies and 0.5 basis points for passive ones if they gain a new allocation through DC Nexus.

Aon Hewitt partnered with eVestment LLC, Marietta, Ga., to provide plan executives with information on all institutional fund offerings, including separate accounts and collective investment trusts, in addition to mutual funds; Aon pays eVestment a licensing fee; managers complete a short questionnaire on eVestment.

When DC plans search for a manager to run $50 million or more, their executives or consultants can use an auction option on the platform that allows for three rounds of bidding with finalist firms — typically three to five managers. Finalists submit blind bids in the first round and later are able to see the fee structure proposals of their competitors.

“It sounds a little different, but not completely unwound from a revenue-sharing arrangement,” said Ross Bremen, a partner with Cambridge, Mass.-based investment consulting firm NEPC LLC, who was not familiar with the product, “The part that could be new is the competition at the end,” where managers bid competitively on fee structures, as well as the use of eVestment, rather than Lipper Inc. or Morningstar Inc.

Aon Hewitt has more than 100 record-keeping clients with an average plan size of $2.5 billion; all are expected to be connected to the platform by the end of the year.

Mr. Evens said the auction process could help plans to get the best fees. The auction differs from a typical RFP or search, in which a board will interview finalists, select a manager and then negotiate. In that scenario, it is more difficult to ask a manager for concessions after the plan already expressed its intent to hire them, Mr. Evens said on the DCNexus platform, the finalist managers compete on fees before any firm is selected.

No accounts have been awarded through the DCNexus platform yet and Mr. Evens does not expect any until next year. He added the distribution fee of three basis points is in addition to typical revenue-sharing agreements with record keepers, but it is “eminently digestible” for managers.

In addition to the auction function, the platform allows plan executives to see daily valuations of all funds in their investment lineup, Mr. Evens said. Many DC plans use smaller, more local consultants, and DC Nexus will offer them more resources, especially for monitoring separate accounts and CITs, Mr. Evens said.

“Nexus doesn't intend to be qualitative — there's no buy, sell or hold,” Mr. Evens said. “Nexus is not trying to get in the way” of investment consultants.

“We would caution anyone from making hiring decisions based solely on quantitative data,” said Diana Greenstone, San Francisco-based principal and senior investment consultant at Mercer LLC. She added Mercer offers more services and qualitative perspectives in its consulting.

Mr. Bremen also does not view the platform as a threat. In addition to screening managers and making recommendations on selections, consultants also help create investment policies, develop investment manager criteria, provide regulatory updates, benchmark fees and originate plan designs, he said.

“Plan sponsors are looking to get as many fiduciary protections as possible,” Mr. Bremen said.

Brant Suddath, director of benefits at The Home Depot Inc., Atlanta, has been using DC Nexus for about six months and said he likes having access to all the information whenever he wants. One of the best features is an educational hub, where managers can submit research alongside Aon Hewitt's own reports and white papers, he added.

“The industry needs tools like these,” Mr. Suddath said. “What Nexus offers is consolidated information of existing plan options and availability to look at institutional offerings outside the plan. It provides nice transparency and comparison of options.”

The $5 billion 401(k) plan actively manages total plan costs, and DCNexus allows for great fee comparisons, Mr. Suddath said.

“There's so much opportunity for the plan sponsor community to better drive down costs. ... The tool will help at minimum, directionally, showing funds that meet the same criteria and investment profile, but with lower or similar fees,” Mr. Suddath said.

Because not all managers are on the platform, Mr. Suddath said he can do his own research on the platform and then discuss other available options with the plan's consultant, Hewitt EnnisKnupp. Over time, he expects most of the money manager community to participate in DCNexus.

Nexus is also being seen as a potential boon for the money manager community.

Tom Kelly, Downer's Grove, Ill.-based vice president, director and national account manager to DC retirement platforms at Legg Mason Inc., Baltimore said the platform is beneficial to DC investment-only firms. He likes that plan executives can monitor all the strategies in the database themselves.

“It's a distribution potential for us,” he said. “We like the level playing field. You are going against the same competition, but there is no advantage.”

Mr. Kelly said all record keepers have similar databases, but very few get information from investment managers themselves, which is “slightly unique here.”

Rob Capone, Boston-based executive vice president and head of retirement at BNY Mellon Investment Management, New York, said Aon Hewitt's platform could spur more discussion between plan executives and their consultants, resulting in a more proactive approach to managing plans.

“Consultants would like to see analytical capabilities all in one place,” Mr. Capone said.

BNY Mellon is still negotiating contracts and looking to eventually provide fund information on the platform for all 15 of its boutique firms. Mr. Capone said. “I see it as free access and shelf space until something is won.”

There are about 140 managers in the database with another 40 in negotiations with Aon Hewitt, Mr. Evens said. About 40% of the top 30 managers, as ranked by Aon Hewitt, have signed up; another 36% of the top 30 are in discussions.

The 10 largest DC managers are not on the platform, but Aon Hewitt remains in discussions with most large managers, which have not declined participation, Mr. Evens said. “"No' is very different than taking your time,” he said.

Mr. Evens said the end goal for Aon Hewitt is to win more clients and differentiate its record-keeping offering.

NEPC's Mr. Bremen said it is not surprising that an unbundled, independent record keeper would pursue something like this. He said an independent record keeper stands to benefit from a greater distribution of non-proprietary funds, which helps eliminate the advantage of other record keepers with proprietary funds.

Alisa Plazonja, consultant at Hager Strategic Inc., Washington, said many plans use a bundled provider and are concerned they are losing something when moving to an unbundled model, even if recent years have shown that not to be the case.

“It seems to me this could be something that could ease concerns,” Ms. Plazonja said. “It's harder to claim things will fall through the cracks.”