401(k) investment lineup tweaks reveal a big focus on fees

More than 100 U.S. corporate 401(k) plans in 2021 made changes in their investment options lineups, emphasizing a focus on fee savings and overall efficiency, consultants said.

About 13% of filings showed plans that made at least one investment option change during the year, with the majority affecting individual equity options, a Pensions & Investments analysis of recently released 11-K filings showed.

P&I compared 841 11-Ks filed with the Securities and Exchange Commission between May 18 and June 29 with filings in 2020 and found that 110 U.S. corporate 401(k) plans added or removed at least one investment option last year.

Those plans had assets totaling $209 billion and added 185 investment options from 54 managers in the year ended Dec. 31. Plans in that same universe removed 178 investment options from 52 managers during that same period.

Among the 11-K filings observed over the period, 72% of added funds were equity options, while 15% involved fixed-income funds. New target-date fund lineups accounted for 6% of changes, 2% in asset allocation/balanced funds and the rest in other asset classes.

Among the 185 new investment options recorded in 11-K filings, plan sponsors turned most frequently to Fidelity Investments Inc., adding 28 individual investment options, which totaled $647 million as of Dec. 31, and two target-date fund series, which totaled $770 million in plan assets as of Dec. 31.

Among plans that removed investment options in 2021, Vanguard Group Inc. was the most-affected manager, with a total of 47 Vanguard-managed individual investment options removed during the year. According to the previous year's 11-K filings, those funds had $4.2 billion in plan assets as of Dec. 31, 2020. Three plans also removed Vanguard-managed target-date fund series, which had a total of $1.1 billion in plan assets.

Among active managers, J.P. Morgan Asset Management and Columbia Threadneedle Investments were the most-added managers, with seven plans each adding their active equity funds. The managers' added funds had $354 million and $88 million, respectively, in plan assets as of Dec. 31, according to new 11-K filings. Also among active managers, Dimensional Fund Advisors had the most funds removed during 2021 among the filings analyzed. Eleven plans removed equity investment options managed by Dimensional, which had a total of $794 million in plan assets as of Dec. 31, 2020, according to last year's 11-K filings.

The vast majority of Fidelity options added and Vanguard options removed were passive investments, just as they had been in previous years' analyses.

Bill Ryan, Chicago-based partner and head of defined contribution solutions at NEPC LLC, said in a phone interview there was a big push in 2021 at reducing the pricing for investment lineups' passive tier.

Specifically, he said plans would look at the interrelationship between their target-date fund series and their passive core investment option lineups and conduct manager searches with the intention of using one manager for both target-date funds and passive core options. That scale would enable plans to save on fees.

"They may stay with the incumbent, but you're still seeing the lowering of fees," he said.

Jessica Ludwig, managing partner, associate director of institutional consulting at Fiducient Advisors, Chicago, said that continuing strong investment returns caused significant asset gains in 2021 that enabled more plans to reach the investment minimums to qualify for certain collective investment trust share classes that offer lower fees.

"Many of our clients, and not just the jumbo-size plan market, were able to make even greater fee concessions across their target-date suites," Ms. Ludwig said. "They've been able to migrate even from an institutional mutual funds to the next tier of the CIT vehicle."

She added that this kind of activity has also trickled into 2022.

Mr. Ryan also said that plans are looking more closely at core investment options now that fewer assets are devoted to them.

Mr. Ryan said his firm is seeing about 44% of clients' assets in target-date funds and 56% in core lineups.

"Ten years ago, about 28% of client assets were in target-date funds, with 72% in the core lineup," Mr. Ryan said.

If a plan committee looks at an individual investment option that once held 5% of the assets in the plan and that has gone down to 2% or 1%, it has to ask: "What's the purpose of every investment option?"

"We've been spending a lot of time the last year revisiting what's the role of the different options and that might come down to downsizing," Mr. Ryan said.

Ms. Ludwig said that within the core investment option menu, more plans are looking at fixed income.

"As the entire retirement industry continues to shift focus a bit from the accumulation phase to the decumulation in retirement years, you see a great appetite to expand the fixed-income offerings within an investment menu," Ms. Ludwig said.

This could represent greater expansions of plans' fixed-income suites, which have historically been more streamlined, she said. This could be the addition of more core-plus fixed-income funds, and perhaps Treasury inflation-protected securities and high yield.

Greg Ungerman, Callan's senior vice president and defined contribution practice leader, said in a phone interview that between 10% and 15% of plans tend to make menu changes in any given year, and so trends in investment option changes occur at the "very margin."

"Sometimes it's cleaning up of perhaps a legacy fund, a sacred cow that had a long-time portfolio manager depart or some sort of performance issue," Mr. Ungerman said. "Largely, it's more organizational and portfolio manager-specific based that might be the catalyst to eliminate the fund."

Mr. Ungerman said that in Callan's most recent defined contribution trends survey conducted in the fall of 2021, among respondents who said they had added investment options, 21% said they had added a brokerage window.

"They might do analysis on things like ESG and couldn't come to a pure consensus of which ESG fund to add and decide what was most important given the DOL uncertainty. It allowed plan sponsors to feel comfortable that participants could utilize the brokerage window and exercise their particular ESG views," Mr. Ungerman said.

Among the 11-K filings analyzed, no plans disclosed the addition of a new target-date fund series that did not already have one, reflecting the completion of a nearly universal adoption of target-date fund series as the default investment options over the past decade.