Cost savings seen as main force behind 401(k) shifts

Changes made to the investment lineups of corporate 401(k) plans in 2019 reflect U.S. sponsors' ongoing focus on cost savings, a Pensions & Investments analysis of recently released 11-K filings shows.

Changes to index fund lineups among plans were prevalent, with many adding to their passive tiers or changing index fund providers, with Fidelity Investments seeing a number of wins and Vanguard Group seeing a number of losses.

P&I compared reports filed between May 15 and July 10 with the Securities and Exchange Commission with filings in 2019 and found that 92 U.S. corporate 401(k) plans added managers of at least one investment option last year. Those plans had assets totaling $154 billion and added 189 new investment options from 44 managers in the year ended Dec. 31. Plans in that same universe removed 192 investment options from 62 managers during the same period.

Overall, the majority of changes involved equity investment options, data show.

Among the 942 11-K filings observed over the period, 62% of added funds were equity options, while 14% involved fixed-income funds. New target-date fund lineups accounted for 9% of changes, 1% in stable value funds and the rest in other asset classes.

Among the 199 new investment options recorded in 11-K filings, plan sponsors turned most frequently to Fidelity Investments, adding 52 individual investment options, which totaled $1.3 billion as of Dec. 31, and two target-date fund lineups, which totaled $325 million in assets as of Dec. 31.

Among plans that removed investment options in 2019, Vanguard Group was the most-affected manager. Twenty-four plans removed a total of 61 Vanguard-managed investment options. According to the previous year's 11-K filings, those funds had at least $2.1 billion in assets in plans as of Dec. 31, 2018. Not all funds' assets were disclosed.

Of the 92 recorded plans that added investment options in 2019, 16 plans added Fidelity-managed index funds to their lineup, and 23 plans removed Vanguard Group-managed index funds.

On the other side, seven plans removed actively managed investment options managed by Fidelity and two each removed Fidelity's Freedom lineup of target-date funds and individual index funds. Seven plans added Vanguard index funds, three added Vanguard active funds, two added Vanguard money market funds and one added a target-date fund lineup managed by Vanguard.

Huntington Bancshares Inc., Columbus, Ohio, was one of the plans that added multiple Fidelity index funds that now hold a significant amount of the total plan assets. The plan added four Fidelity index funds to the lineup in 2019, which represented a total of $335 million in assets as of Dec. 31, or 26% of a total $1.3 billion in assets.

Continental Materials Corp., Chicago, also added two Fidelity index funds, which had a total of $10 million of the plan's total of $43 million in assets as of Dec. 31. Company spokesman Guy Chipparoni said the funds, which replaced similar index funds managed by Vanguard and BlackRock Inc.'s iShares, were added because they "offered nearly 50% cost savings to participants."

Jessica Ludwig, partner, associate director of institutional consulting at DiMeo Schneider & Associates LLC, Chicago, said in a telephone interview that most corporate plan sponsors first took a "wait-and-see" approach after Fidelity lowered fees on its index funds across the board in 2018.

Eventually, however, some took action in 2019, due to unease that the index funds they offered in their investment lineups were not the lowest-cost options available. And some larger plans have used Fidelity's fee reductions as leverage with their current managers, Ms. Ludwig said, "to negotiate either access or the friendlier terms through collective investment trust vehicles, especially if they've already got a CIT in place."

D. Micah Fannin, Omaha, Neb.-based partner and senior investment consultant at Mercer Investments, agreed the "race to zero" continued in 2019 with plans seeking funds with the lowest costs.

"There's a lot of activity by plan sponsors trying to stay on top of lowest-cost share classes for their particular situation and so that can result in moving away from a certain provider, moving to another provider," Mr. Fannin said.

"Whether Fidelity's been a disproportionate recipient of those assets or not, I see that across all the big providers," Mr. Fannin said. "They're all kind of in the same scrum fighting for those assets, and they're all seeing success."

Defined contribution plan consultants say 2019 overall did not offer anything markedly different from the past few years and continued the trend of keeping costs and fiduciary responsibilities in mind in the wake of fiduciary-related lawsuits.

Greg Ungerman, senior vice president and defined contribution practice leader for consultant Callan LLC, San Francisco, said in an interview the trend of plans establishing an active/passive mirror structure of investment options continues. "They're offering both an active and passive option to allow participants to pick and choose if they want to try to achieve better results than the index or just at the cheap market exposure," he said.

As litigation against plans related to fees charged by their investment options continued at a pace Mr. Ungerman said has not been slowed by the COVID-19 pandemic, offering index funds that charge lower fees is an easy decision.

He said index funds are quantitative in nature because their costs to 401(k)s are easy to analyze, as opposed to actively managed funds, which require subjective analysis of expected future performance.

Mr. Ungerman said Callan's client base, which tends to be the largest 401(k) plans, has seen an increase in the average of non-target-date fund investment options offered to 14 from 11 or 12 in the past few years, primarily due to the addition of index funds.

Ross Bremen, a partner at investment consultant NEPC LLC, Boston, said passive products have been attractive to plan sponsors in recent years due to strong index performance.

"The performance of passive management relative to active has been strong over many, many years, so it's not surprising to see plan sponsors — especially plan sponsors that were experiencing some underperformance from their active managers — that they would be thinking about passive managers," Mr. Bremen said.

Plans have changed index fund providers due to fee pressure resulting from the continuing trend of plan participants filing lawsuits alleging companies have violated their fiduciary duties by using higher-cost investment options. That has put pressure on the index fund providers to continue lowering their fees to win business.

"(They) are not immune from pricing pressures," Mr. Bremen said, "so we've seen some increased competition in the passive management space, and some managers have become much more aggressive and as a result have been successfully gathering additional assets."

Some of the more notable changes in 2019 included significant wins for index fund collective investment trusts managed by State Street Global Advisors.

• Humana Inc., Louisville, Ky., added three index fund CITs managed by SSGA in 2019. Those CITs had a total of $816 million in assets out of the total $5.4 billion in the insurer's 401(k) plan. Those CITs replaced similar trusts managed by Mellon Investments.
• Simon Property Group Inc., Indianapolis, as part of its complete overhaul of its lineup in 2019, added a lineup of 11 target-date CITs and five index fund CITs managed by State Street Global Advisors. As of Dec. 31, SSGA managed $285 million of the plan's total $476 million in assets. Fidelity had been the plan's prior index fund provider.
• Valvoline Inc., Lexington, Ky., also overhauled its lineup, adding 14 CITs managed by Aon Investments USA, which had a total of $174 million in assets in the plan as of Dec. 31, and three passive CITs managed by SSGA, which had $105 million in assets in the plan as of Dec. 31. Vanguard Group had been the plan's prior index fund provider.

Consultants said plan sponsors are increasingly talking about retirement income and private equity as a result of federal legislation and regulatory activity, but actual changes have yet to come.

"The conversation was significantly fueled by the SECURE Act and some of the language or clarifications around insurance products and so that really continued to fuel that conversation but we haven't really seen a lot of activity on terms of movement toward income products," Mr. Bremen said.

Among other things, the SECURE Act provides a safe harbor for plan sponsors to provide in-plan retirement income options such as an annuity.

DiMeo Schneider's Ms. Ludwig said more of her firm's corporate clients are expressing interest in environmental, social and governance investment options.

"We've long seen our non-profit institutional clients incorporate some kind of ESG option in their investment menus," Ms. Ludwig said, "but I would say what's starting to shift a bit more is we're seeing more interest among our corporate retirement clients as well."

Ms. Ludwig cited growing interest and demand from plan participants, and even if that is a minority of participants, she said companies have been willing to consider adding one or two ESG-related options because of the appetite for increased employee engagement.

Questions regarding fiduciary best practices, however, could delay adoption of ESG options. The Department of Labor on June 23 introduced a proposal reinforcing that ERISA plan fiduciaries cannot invest in ESG vehicles that take additional risk or sacrifice returns.

Finally, amid the COVID-19 pandemic, consultants say most of their clients are going ahead with business as usual.

Callan's Mr. Ungerman said the market volatility in March and April made changes in investment lineups problematic because of the inability to evaluate managers on a short-term basis, but the pandemic and the need to work remotely hasn't made things more difficult for investment committee members.

"I think people have gotten used to all the different forums of videoconferencing and conference calls, so when there does need to be a change, there has not been an impediment to taking necessary action," he said.

Who won, lost in 2019

Managers with the most total 2019 hiring and termination volume disclosed in 11-K filings, in millions, as reported by P&I.

Hirings

Total

State Street Global Advisors

$1,917

Callan

$1,751

Fidelity Investments

$1,596

BlackRock

$1,295

Capital Group

$593

Wellington Mgmt.

$515

Vanguard Group

$473

T. Rowe Price

$255

Mellon

$180

Aon

$174

Loomis, Sayles

$172

Fidelity Institutional Asset Mgmt.

$154

Lord, Abbett

$139

Mercer

$137

MFS Investment Mgmt.

$96

Acadian Asset Mgmt.

$94

PGIM Fixed Income

$92

Northern Trust Asset Mgmt.

$72

Goldman Sachs

$64

Dodge & Cox

$57

American Century Investments

$36

Janus Henderson Investors

$35

J.P. Morgan Asset Mgmt.

$34

Boston Trust & Investment Mgmt.

$29

Dimensional Fund Advisors

$20

GW&K Investment Mgmt.

$18

Neuberger Berman

$16

Carillon Tower Advisers

$14

Wasatch Global Investors

$12

LSV Asset Mgmt.

$10

Arrowstreet Capital

$8

Columbia Threadneedle Investments

$8

Western Asset Mgmt.

$8

American Beacon Advisors

$7

Artisan Partners

$7

Victory Capital Mgmt.

$7

AllianceBernstein

$6

WCM Investment Mgmt.

$6

Wilmington Trust

$6

Morgan Stanley

$5

Invesco

$3

Hartford Financial Services

$2

PIMCO

$1

Putnam Investments

$1

Terminations

Total

Vanguard Group

$2,094

Northern Trust Asset Mgmt.

$1,331

Mellon

$595

Dodge & Cox

$566

Fidelity Investments

$379

J.P. Morgan Asset Mgmt.

$274

Prudential Financial

$220

Capital Group

$198

PIMCO

$197

Fidelity Institutional Asset Mgmt.

$157

Columbia Threadneedle Investments

$136

Thornburg Investment Mgmt.

$136

T. Rowe Price

$111

Fifth Third Bank

$97

BMO Global Asset Mgmt.

$85

Invesco

$85

Federated Hermes

$77

RidgeWorth Investments

$68

Allianz Global Investors

$49

Frontegra Asset Mgmt.

$49

Victory Capital Mgmt.

$49

Harbor Capital Advisors

$42

BlackRock

$38

Goldman Sachs

$36

William Blair

$36

Voya Investment Mgmt.

$32

SEI Investments

$28

American Beacon Advisors

$25

Dimensional Fund Advisors

$25

HS Management Partners

$25

State Street Global Advisors

$24

Macquarie Asset Mgmt.

$21

Neuberger Berman

$21

Principal Global Investors

$20

Harris Associates

$19

Lord, Abbett

$19

Hartford Financial Services

$18

Aberdeen Standard Investments

$17

Putnam Investments

$15

Loomis, Sayles

$14

MFS Investment Mgmt.

$14

New York Life Investments

$13

Baron Capital Group

$12

LSV Asset Mgmt.

$12

Artisan Partners

$11

Franklin Templeton

$11

QMA

$11

Western Asset Mgmt.

$10

Frontier Capital Mgmt. Co. LLC

$9

Glenmede Investment Mgmt. LP

$9

Morgan Stanley

$9

Natixis Advisors LP

$9

PNC Capital Advisors LLC

$8

Symons Capital Mgmt.

$8

American Century Investments

$7

ClearBridge Investments

$7

Sterling Capital Mgmt. LLC

$7

Boston Partners

$5

Carillon Tower Advisers Inc.

$5

MassMutual

$4

Nuveen

$3

Virtus Fund Advisers LLC

$1

Source: P&IQ searches & hires database (researchcenter.pionline.com/archive/piq)