More than 60 U.S. corporate 401(k) plans in 2022 made changes in their investment options lineups, down from over 100 plans the previous year.
Slightly less than 8% of 11-K 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 847 11-Ks filed with the Securities and Exchange Commission between May 23 and July 14 with filings in 2022 and found that 65 U.S. corporate 401(k) plans added or removed at least one investment option last year.
The number of plans that made changes in 2022 was down significantly from the prior year. Last year's comparison of 841 11-Ks found that 110 U.S. corporate 401(k) plans, or just over 13%, added or removed at least one investment option in 2022.
Greg Ungerman, Callan LLC's San Francisco-based senior vice president and defined contribution practice leader, said there is very little change among 401(k) plans year over year, and there could likely be less because some trends are reaching completion.
"I do agree that (what) we are seeing from a small trend perspective is that those that embarked over probably the last decade on building out an active/passive mirror, where for every active fund you have a passive fund for participants, that really has perhaps run its course," Mr. Ungerman said in an interview.
Plans that made some change since the beginning of 2022 had assets totaling $139.9 billion. They added 100 investment options from 36 managers in the year ended Dec. 31. Plans in that same universe removed 92 investment options from 35 managers during that same period.
Among the 11-K filings observed over the period, 75% of added funds were equity fund options, while 13% involved fixed-income funds. New target-date fund lineups accounted for 7% of changes, 2% in real estate funds and the rest in other asset classes.
Among the 100 new investment options, plan sponsors turned most frequently to Fidelity Investments, adding 18 individual investment options, which totaled $166 million as of Dec. 31, while FNB Corp., Pittsburgh, and Tredegar Corp., Richmond, Va., each added target-date fund series, which totaled $185 million in plan assets as of Dec. 31.
In addition, Essential Utilities, Bryn Mawr, Pa., and Mattel Inc., El Segundo, Calif., also changed record keepers to Fidelity during 2022.
Among plans that removed investment options in 2022, Vanguard Group Inc. was the most-affected manager, with a total of nine Vanguard-managed individual investment options removed during the year. According to the previous year's 11-K filings, those funds had $8.9 billion in plan assets as of Dec. 31, 2021. One company — Tredegar Corp. — also removed a Vanguard-managed target-date fund series, which had a total of $91 million in plan assets.
Those were not the only losses suffered by Vanguard recently.
One plan sponsor — Chevron Corp., San Ramon, Calif. — disclosed a later change in its 11-K filing. The oil company disclosed that it transitioned all target-date and most index funds to BlackRock Inc. from Vanguard, effective May 31.
As of Dec. 31, the plan had eight index funds managed by Vanguard, according to the 11-K filing. The funds had $6.6 billion in assets in the plan as of that date, while Vanguard's 12 target-date funds had a total of $1.8 billion in plan assets.
Chevron spokesman Randy Stuart said the company periodically reviews the plan "to ensure it continues to meet financial goals in retirement," according to a July 10 email. The changes "are a result of a recent review focused on the Plan's investment options, fund performance, investment glide path and fees. The plan will continue to offer a diverse set of investment options for participants to create portfolios that align with their personal goals and risk tolerance."
While Vanguard led the ranks of managers whose funds were removed, more Vanguard funds were added in 2022 than removed.
Vanguard was the second-ranked manager whose funds were added, with 17 during the year ended Dec. 31.
The vast majority of Fidelity and Vanguard funds that were added or removed were passive strategies.
Changes to and from Fidelity and Vanguard over the past several years have been driven by a larger awareness of fees, and 401(k) plans have responded by changing managers.
Jessica Ludwig, managing partner, director of institutional consulting at Fiducient Advisors, Chicago, said in a phone interview that investment menus for most plans are simply stable after years of making adjustments to their designs, offering both active and passive investment options within a core menu in addition to providing a target-date fund series.
That era of adjustments may be over since the vast majority of plans have already integrated those changes.
"From an investment menu design standpoint they've come so far, and they've evolved, most plans today are in pretty good shape from an overall perspective," Ms. Ludwig said.
Holly Verdeyen, Chicago-based partner and U.S. defined contribution leader at Mercer LLC, said in an interview that most of the changes she's seen from clients this year have largely been performance-based.
"There's been a fair amount of movement in the large-cap growth area," Ms. Verdeyen said. Many of those changes have been due to various funds' positioning around the largest stocks in large-cap growth indexes, along with the whole movement of "AI tailwind," she said.
Ms. Verdeyen also noted that Mercer clients are showing interest in moving more to a single smidcap fund as opposed to separate small-cap and midcap managers.
Emma O'Brien, Boston-based senior consultant at NEPC LLC, said that such a consolidation of core investment options has been driven by the trend of target-date fund lineups continuing to attract assets, meaning that fewer assets are being invested in core investment options menus.
"Sixty-three percent of all contributions are being invested in target-date funds, which is another indicator that target-date funds will continue to shrink that core menu," Ms. O'Brien said in a phone interview.
While most plans have embraced lineups that are structured to offer a target-date fund series as well as active and passive tiers of core investment options, Ms. Verdeyen says she foresees plans beginning to move to a more objectives-based lineup structure.
Her team has identified those objectives as capital preservation, income generation, inflation protection and growth, and that many plans in the near future will look at those objectives and determine which of their existing investment options meet those objectives.
For example, she said, a plan could see that a stable value fund and money market fund in the lineup both share that same objective of capital preservation.
"Then it prompts the discussion about why is that necessary, which one serves the objective better," Ms. Verdeyen said. "Another example is inflation protection and (if) you don't have anything serving that objective, you could add a real asset fund."
In growth, Ms. Verdeyen said her team's view is that, for example, U.S. large cap is generally efficient and there is less opportunity for active managers to add value. A plan could just go with the passive option, "putting a little crack in the mirror," she said.
With income generation, "we've also taken the income objective, split it into fixed income and retirement income and that could potentially lead to additional strategies being added because there are different kinds of strategies that are needed to fill both income objectives."
With the new objective-based structure, Ms. Verdeyen said that you could see overall some lineup consolidation, but also see strategies added in order to meet participants' objectives.
While some plans may expand their index fund offerings, for example, 2022 lacked any kind of big announcements from a manager like Fidelity regarding the lowering of their fees.
"Perhaps that's why things are kind of — I don't want to say they've bottomed out — but in some respects, there's not much more room on the index front to reduce (fees) and it's been relatively quiet on fee compression," Ms. Ludwig said.
Among active managers, MFS Investment Management was the most-added manager, with seven plans each adding one of the manager's active equity funds. MFS' added funds had $40 million in plan assets as of Dec. 31, according to new 11-K filings. Two plans removed MFS Investment Management funds, which represented $28 million in plan assets as of Dec. 31, 2021, according to last year's 11-K filings.
Also among active managers, T. Rowe Price Group had the most funds removed during 2022 among the filings analyzed. Seven plans removed equity investment options managed by T. Rowe Price, which had a total of $367 million in plan assets as of Dec. 31, 2021 and one target-date fund series, which had $120 million in plan assets as of that date, according to last year's 11-K filings.
