Fidelity enjoys big year among lineup changes in 401(k) plans

More than 100 U.S. corporate 401(k) plans made changes to their investment options in 2020 amid the challenges of the COVID-19 pandemic, continuing to emphasize cost savings in reviewing their fund lineups, a Pensions & Investment analysis of recently released 11-K filings shows.

Less than 1 in 8 plans disclosed changes in their lineups, but many of those that did so changed their index fund providers, with Fidelity Investments seeing a number of wins and Vanguard Group Inc. seeing a number of losses for the second year in a row.

P&I compared 880 11-K filings with the Securities and Exchange Commission between May 28 and June 30 with filings in 2020 and found that 101 U.S. corporate 401(k) plans added at least one investment option last year.

Those plans had assets totaling $229 billion and added 281 individual investment options and 21 target-date fund lineups from 57 managers in the year ended Dec. 31. Plans in that same universe removed 274 individual investment options and 15 target-date fund lineups from 66 managers during the same period.

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

As of Sept. 30, according to P&I data, the average asset allocation of corporate defined contribution plans within the 1,000 largest U.S. plan sponsors was 33.5% domestic equities; 24.6% target-date funds; 10.5% stable value; 7.8% fixed income; 7.2% sponsoring company stock; 7% other; 6.7% international equities; 1.9% cash; 0.5% inflation-protected securities; and 0.3% annuities.

Among the 880 11-K filings observed over the period, 67% of added funds were equity options, while 16% involved fixed-income funds. New target-date fund lineups accounted for 7% of changes, 3% in asset allocation/balanced funds and the rest in other asset classes. A total of seven plans also made new disclosures on record-keeper changes.

Among the 302 new investment options recorded in 11-K filings, plan sponsors turned most frequently to Fidelity Investments, adding 105 individual investment options, which totaled $1.9 billion as of Dec. 31, and two target-date fund lineups, which totaled $206 million in assets as of Dec. 31.

Among plans that removed investment options in 2020, Vanguard Group was the most-affected manager. Twenty-four plans removed a total of 70 Vanguard-managed investment options. According to the previous year's 11-K filings, those funds had at least $3.6 billion in plan assets as of Dec. 31, 2019. Not all funds' assets were disclosed.

The vast majority of Fidelity Investments-managed options added and Vanguard Group-managed options removed were passive investments, just as they had been in 2019.

In 2019, plan sponsors turned most frequently to Fidelity Investments, adding 52 individual investment options out of the total of 199 added, while plans removed 61 Vanguard-managed options out of a total of 192 removed.

Ross Bremen, a partner at investment consultant NEPC LLC, Boston, agreed most fund lineup changes in 2020 represented a continuation of priorities from the previous year. Those priorities include an emphasis on fee savings, and while that has resulted in active funds being dropped for passive funds, it also means existing passive lineups are under increasing scrutiny.

"I think to the extent that (ERISA fiduciary) litigation has been on the forefront and we continue to see record numbers of fee-related cases, passive investments have not been immune," Mr. Bremen said. "While a lot of plan sponsors had moved to cheaper index funds in recent years, we continued to see some plan sponsors moving to cheaper vehicles in 2020."

D. Micah Fannin, Omaha, Neb.-based partner and senior investment consultant at Mercer Investments, said fees remain on the foremost of plan sponsors' minds due to the growing number of ERISA lawsuits in recent years claiming plans had breached their fiduciary duties in offering high-cost investment options.

"There were a record number of lawsuits in 2020 relative to prior years," Mr. Fannin said. "My understanding is that pace of those ERISA claims in 2021 have slowed a little bit after the feverish pace in 2020, but plan sponsors are still very much aware of the litigious environment. Investment fees are very much in the crosshairs of what committees are looking at."

Jessica Ludwig, managing partner, associate director of institutional consulting at Fiducient Advisors, Chicago, said the strength of investment returns in 2020 gave even smaller plans greater leverage in demanding fee savings.

She noted the exceptional equity markets in 2020 may have pushed many smaller plans' asset sizes high enough that they qualified for the investment minimums required for investing in collective investment trusts and lower-cost share classes.

"I think even active managers have been a bit more receptive to negotiations," Ms. Ludwig said. "Perhaps a CIT may have had a pretty high barrier, but we've seen that really come downstream where even smaller plans can access a CIT and pass along those savings to participants."

While there were not a great many changes by her clients in 2020, Ms. Ludwig did point to another trend in plans hiring a new active manager.

"I would say there was an uptick in movement changes that were made due to personnel departures," Ms. Ludwig said. "That could be retirements — there are some star portfolio managers that are getting up there in age — and like so many industries, many of these firms have had voluntary separation packages and we have seen some active managers (affected by that)."

The COVID-19 pandemic had little effect on 401(k) plan sponsors monitoring and taking action on their fund lineups in 2020, Mr. Fannin said.

"Plan sponsors still have that obligation to follow their governance processes," Mr. Fannin said, "and so while meeting became more difficult initially, the transition from meeting in person to meeting virtually happened overnight. Once they got into a cadence, it was like we had been doing that for a really long time."

Mr. Fannin said, however, that a lot of plans did re-evaluate their governance structures in 2020.

"Do we want to continue ... meeting quarterly and having advice from an adviser inform our decisions?" The result, Mr. Fannin said, is that a number of sponsors have moved to an outsourced chief investment officer-type of arrangement in which they can outsource some of the selection and oversight of investment options.

Mr. Bremen said while half the plan sponsors might characterize 2020 as "business as usual," the other half may have said they were busier than usual with items like CARES Act provisions regarding hardship withdrawals or loans, especially if the company was in an industry particularly hit hard by the pandemic and forced to furlough or lay off employees.

Investment options lineups may not have been a priority for that first half in 2020, Mr. Bremen said.

In 2021, however, "you might now have time to revisit some of those things that you didn't get to in 2020."

The largest overhaul of investment options seen in the analysis of 11-K filings was the result of the merger of the SunTrust Banks Inc. 401(k) Plan into the Truist Financial 401(k) Savings Plan, effective July 31, 2020.

Truist Financial Corp., Charlotte, N.C., one of the nation's largest commercial banks, was launched in 2019 after the completion of the merger of BB&T and SunTrust banks in December 2019.

The merger of the 401(k) plans resulted in a re-evaluation of both plans' lineups, company spokeswoman Amy Konrath said in an email. The plan's employee benefit plan committee worked with Truist's investment consultant in selecting those investment options "most appropriate for Truist," Ms. Konrath said.

The newly merged plan, which had $9.7 billion in assets as of Dec. 31, according to its 11-K filing, was responsible for some of the biggest individual manager wins of the year, which included the additions of the MFS Growth Fund, an active domestic large-cap growth equity fund managed by MFS Investment Management Inc. and the T. Rowe Price Institutional Mid Cap Fund, an active domestic midcap equity fund managed by T. Rowe Price Associates Inc., neither of which was previously an option in either plan. The funds had $688 million and $659 million, respectively, in assets in the plan as of Dec. 31.

Another significant change was made by Capital One Financial Corp., McLean, Va.

That company added the State Street S&P 500 Index trust, a passive domestic large-cap equity CIT managed by State Street Global Advisors, which had $1.4 billion in assets in the $7.8 billion 401(k) plan as of Dec. 31, and removed the T. Rowe Price Institutional Large Cap Growth Fund and T. Rowe Price Institutional Large Cap Value Fund, both active domestic large-cap equity funds managed by T. Rowe Price, which had $427 million and $318 million, respectively, in assets in the plan as of Dec. 31, 2019.

Company spokesman Sie Soheili did not reply to requests for further information.

For the remainder of this year, consultants do not anticipate any real changes in fund lineup priorities, although they see plans exploring further education on items like ESG investing.

"We're having a lot of discussion with clients around environmental, social and governance factors," Mr. Fannin said, "and also diversity equity and inclusion so there's a clamoring by plan sponsors to understand the trends in those areas and what it means to 401(k) plans and whether they should and how and if they should address those within their 401(k) lineups."

Greg Ungerman, senior vice president and defined contribution practice leader for consultant Callan LLC, San Francisco, said, "At the margin there are discussions on ESG and retirement income solutions, but not a lot of actually implementation."

"It's more either education or 'wait and see' specific to ESG," Mr. Ungerman said. "A lot of that is wrapped in waiting for the Department of Labor to provide guidance."