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CHART CENTRAL

For DC plans, change can be good

New research from Morningstar explores the effects of fund replacement on defined contribution plans. The study's null hypothesis, supported by previous related research, is that replacement funds do not significantly outperform their historical record, nor do they outperform their peers after replacement.

The sample set included 3,478 fund replacements by DC plan sponsors between 2010 and 2018, with 2018 and 2014 being the most active years with 515 and 535 total replacements, respectively. U.S. large-cap and blended-cap equity strategies were the most often replaced funds across the plans observed, followed by allocation funds (including target-date funds) and intermediate bond funds. Although the researchers do not specify whether the allocation style class replacements include the removal and addition of old and new fund vintages.

Most of the funds in the study were actively managed, with 89.3% of the funds replaced being actively managed and 87.3% of the replacement funds were actively managed.

The key drivers motivating replacement were fees and historical performance. Funds with lower fees, both replacement and replaced funds, show a larger divide than those with higher fees. Replaced funds with higher relative fees tend to be replaced more with higher fee funds, but on average, the replacement funds had about 6 basis points less in fees. A look at performance is promising, showing that, on average, the one- and three-year return ranks of the replacement funds are higher than the funds they replaced. Universe rankings in the study were reversed, with 100 being the best and 1 the worst.