A continuing desire to reduce costs and a concern over litigation risk has prompted defined contribution plans to adjust their investment strategies, according to Callan’s latest annual survey of DC plans published April 25.
One example is the greater use of an active/passive mirror in which “virtually all core assets classes are represented by both active and passive options,” said a report about the Callan survey. The percentage of plans using this approach last year was 45% vs. 28% in 2022. In 2016, it was 22%.
“This was an all-time high,” said Jamie McAllister, Callan’s senior vice president and defined contribution consultant, referring to the mirror strategy.
“A lot of it has to do with litigation over fees,” she said. “Sponsors want to offer lower cost investments.”
McAllister predicted the mirror approach will grow, but she added that “it is not a silver bullet” against an ERISA lawsuit.
Overall, 91% of plans surveyed by Callan offered a combination of active and passive investments last year through the mirror strategy or a mix-and-match approach of active and passive investments.
Plans offering only passive investments accounted for 9% of survey respondents; an all-active menu represented only 1%.
Another fee-cutting indicator was the growth of collective investment trusts at the expense of mutual funds. Last year, 82% of respondents offered CITs, while 80% offered mutual funds. (Multiple answers were allowed.)
For the survey covering 2021, Callan reported that 85% of plans offered mutual funds vs. 79% offering CITs. The following year, it was 84% for CITs and 79% for mutual funds.
CITs “tend to be lower cost,” McAllister said. Also, CITs don’t use revenue-sharing, which has become less popular among DC plans over the years.
When asked how participants pay for plan administration, only 15% of respondents cited revenue-sharing compared with 78% for explicit per-participant dollar fees and 25% for explicit asset-based fees. (Multiple answers were allowed.)
For participants, CITs have become easier to use and to understand over the years because “they have the look and feel like a mutual fund,” McAllister said.
If Congress enacts a law allowing 403(b) plans to offer CITs, that will accelerate their use, she said. The House of Representatives in March approved a securities law bill that included the 403(b) CIT provision. The Senate hasn’t acted.
The latest Callan survey, conducted online in late 2023, featured responses from 132 DC plans, both clients and non-clients. Eighty-nine percent had more than $200 million in assets; including 64% with more than $1 billion in assets. Fifty-eight percent had more than 10,000 participants. Two-thirds of respondents were corporate plans, followed by public plans (16%), tax-exempt plans (15%) and other plans (2%).
Sponsors reaffirmed their desire for flexibility in plan management. For example, only 13% offered CITs and mutual funds from their record keeper last year, and the same percentage is expected this year. That was down from 16% in 2022 and from 48% 10 years ago.
“Pretty much every record keeper has gone to an open architecture platform,” McAllister explained. There’s more transparency and flexibility, she added, because a record keeper’s target-date series may not be the most appropriate for the demographics of a specific DC plan’s workforce and retirees.
Among other results, the survey found:
- The two biggest fiduciary actions that DC plans will take this year are reviewing plan fees (74%) and implement, update or review the investment policy statement (66%). These were the top two actions last year although their ranking was reversed. (Multiple answers were allowed.)
- The most popular fee initiatives this year are conducting a fee study (66% said they were very likely or somewhat likely to do so); moving to lower cost investment vehicles (65%); evaluating indirect compensation (52%); and evaluating manage account fees (52%). (Multiple answers were allowed.)
- Most plans (76%) did not offer an environmental, social or governance fund in their lineup and aren’t interested. Fifteen percent offer an ESG fund and 9% will consider adding one.
