Fee pressure results in move to passive, Callan DC exec survey finds

Passively managed investment options are attracting greater interest among defined contribution plans thanks to plan executives' efforts to reduce fees, according to the latest Callan Associates annual survey, released Tuesday.

The survey of 107 plan executives — most of whom represent 401(k) plans — show that 24.1% expect to increase the proportion of passive funds in their lineup compared to 12.5% who increased the passive-fund proportion last year, said a report of the survey results.

“Fees play a role,” Lori Lucas, Chicago-based executive vice president and defined contribution practice leader, said in an interview. “When sponsors look at (fee-related) lawsuits, they see more comfort in having passive funds.”

Last year, while 12.5% of plans increased their proportion of passive funds, 4.2% increased their proportion of active funds, while 83.3% didn't change the mix of active and passive funds, the survey report said.

The Callan report also noted the percentage of sponsors offering an “active/passive mirror,” in which major asset classes are represented by both active and passive funds, grew to 21% in 2013 from 21% in 2012.

Plan executives “are growing more sophisticated when it comes to their plan fees, which continue to be subject to downward pressure,” the report said Among plans that conducted a fee review, 44.9% reduced fees last year, 42.9% reduced fees in 2012 (the year federal fee-disclosure rules took effect) and 30.3% cut fees in 2011, according to the report.

Also, 16% of plan executives said they would eliminate company stock from their investment lineup this year, representing “a notable increase from prior years,” the report said. Twelve percent said they would place a cap on contributions to company stock in 2014, also a big increase from previous years.

Among other findings, the Callan survey found:

  • The percentage of plans offering collective trusts rose to 51.9% in 2013 from 48.3% in 2012 and 43.8% in 2011.
  • The percentage of plans offering separate accounts was 50.6% last year, up from 42.5% in 2012 and 40% in 2011.
  • The percentage of plans offering mutual funds was 85.2% last year, down from 92% in 2012 and 95% in 2011.

The Callan survey was conducted online in September and October. Eighty percent of respondents represented 401(k) plans. Among the plans, 58.3% had assets of $1 billion or more and 20.4% had 50,000 or more participants.