Well over 100 U.S. corporate 401(k) plans made changes to their investment option lineups in 2023. That's nearly double the number that disclosed changes the previous year, with 401(k) plans in 2023 saying changes to active domestic large-cap growth equity options dominated.
The number of plans that made changes in 2023 was up significantly from the prior year.
Pensions & Investments compared 819 corporate 11-Ks filed with the Securities and Exchange Commission between May 14 and June 28 with similar filings in 2022.
For 2023, slightly less than 15% of 11-K filings showed retirement plans that made at least one investment option change during the year, with the majority affecting individual active equity options, P&I's analysis of recently released 11-K filings showed.
Last year's 847 corporate 11-K filings found that 65 U.S. corporate 401(k) plans, or just under 8%, added or removed at least one investment option in 2022.
P&I's analysis found that 120 U.S. corporate 401(k) plans added or removed at least one investment option last year. Of that 120 corporate plans, 37 plans made changes specifically with their active domestic large-cap growth equity investment options.
According to the comparison of 11-K filings, J.P. Morgan Asset Management was the most-added manager during 2023, with 36 401(k) plans adding one of its funds. Twenty-seven of those plans added the JPMorgan Large Cap Growth Fund during the year.
The most removed manager was T. Rowe Price Group, with 33 plans removing one of its funds during the year.
Active management
Greg Ungerman, senior vice president and leader of the defined contribution practice at Callan, said that the wide dispersion of large-cap growth fund performance in 2022 led to search activity in 2023.
While there has been a huge dispersion of active management returns in the large-cap growth area for some time, due to the “Magnificent Seven” stocks and similar iterations of big names (such as FAANG), that dispersion was very pronounced on the downside in 2022.
“The long and the short of it is, the Russell 1000 Growth was a very difficult benchmark to beat because of the market leadership,” said Ungerman. “A lot of active managers really don’t have room to overweight those strategies, so many of them are underweighting them just from a concentration (and) risk control perspective.”
Active managers just don’t have a lot of room to move in the large-cap growth space, he added. Ordinarily, if a manager likes a stock, they overweight it.
“But in fact many of their risk parameters limit their abilities (to do so), so therefore they’re underweight,” said Ungerman. “And so even if they like the company, they can’t even maintain an index exposure, so that creates a lot of dispersion.”
While Ungerman said 401(k) retirement plan sponsors certainly think long term beyond those poor results in 2022, the magnitude of underperformance could have been so far outside their tolerance level that those results seriously impacted three- and five-year return numbers.
“It puts a lot of pressure on plan sponsors relative to their investment policies or their particular standards,” said Ungerman. “It’s hard to cut or categorize a very big universe, but I could see how that could put a lot of pressure on certain managers that had a difficult time.”
Turnover among managers, committees
There has also been turnover among portfolio managers of active large-cap growth funds, with a number of them choosing to retire following the COVID pandemic, said Bill Ryan, partner and head of defined contribution solutions at investment consultant NEPC. Those departures just happened to occur while there was this large dispersion in returns.
“(This) creates triggers in investment policy statements,” said Ryan, “so if you have key staff changes and performance challenges, you hit two things that people look at. So while the performance in isolation might not have triggered a change, the portfolio manager changed and the performance is down.”
Ryan and other consultants would not comment on specific funds, but one fund that was potentially affected in that manner was the T. Rowe Price Blue Chip Growth Fund. Larry Puglia, the portfolio manager of that fund since its inception in 1993, retired at the end of 2021.
For the year ended Dec. 31, 2022, a period in which the Russell 1000 Growth lost -29.1%, the Blue Chip Growth Fund lost -38.6%.
According to the P&I analysis, at least ten 401(k) plans removed that fund from their lineups during 2023.
Notably, the Blue Chip Growth Fund would experience a dramatic turnaround in 2023, returning 49.4% for the year ended Dec. 31, well outperforming the Russell 1000 Growth index, which returned 42.1%.
Turnover at money managers isn’t the only potential trigger for large-cap growth fund changes, said Holly Verdeyen, partner and U.S. defined contribution plan leader, at Mercer.
One of the things her consultants shared regarding those changes is they were indeed performance-driven, but also turnover at plans’ investment committees may have prompted changes.
“We observed that sometimes committees are quicker to pull the trigger when there is committee turnover or there's a new committee member,” said Verdeyen. Especially when there's more like a C-suite representation on the committee, sometimes they can have an outsized voice.”
“It is interesting with the ‘great resignation’ and a lot of movement in the job market we’re experiencing that a lot of our committees do have new membership, that the committees have turned over, and they tend to pull the trigger a little bit more quickly,” said Verdeyen.
David O’Meara, senior director and head of defined contribution investment at Willis Towers Watson, said he has also seen turnover at investment committees, but for the most part those new committee members have deferred more to their consultants in making manager change recommendations.
“When turnover happens at super-senior levels, they can have more openness to change,” said O’Meara, “but we’ve seen most of our clients actually be the opposite, and they’ve been more patient and less reactionary.”
O’Meara does believe many retirement plan sponsors in recent years have not exercised that level of prudence.
“I do have a fear that many plan sponsors may have let historical performance dictate their investment manager selections,” he said, “and they’re potentially getting whipsawed in a market like we’re having in this last week (week of July 29) and even today (Aug. 5), where underweighting those (tech) companies would have led to underperformance until this past week.”
Overall, O’Meara said the number of new manager selections among WTW’s defined contribution plan sponsors has trended down in 2024.
“That’s across the board for us (including) international, whether it’s growth or value, equities or fixed income,” said O’Meara. He said really what drove markets beginning in 2020 when the tech sector really took off are driving the markets now.
“So many of our clients have gotten comfortable with the volatility in market rates,” said O’Meara, "with the relative calm followed by rapid volatility, and they’ve been fortunately more patient than what we had seen going back five or 10 years.”
Jessica Ludwig, managing partner and senior consultant at Fiducient Advisors, said that while not pronounced, they have seen their clients increase their activity in target-date fund searches during 2024, likely for due diligence purposes.
“I don’t think there’s some emerging trend that necessarily has triggered that,” said Ludwig, “but there’s a lot of plan sponsors who have perhaps had very long histories with their target-date fund strategies."
Ludwig doesn’t necessarily think many of these clients are going to make a change, but she has had more due diligence conversations with clients during the second quarter than recent quarters. "To the extent there is an active management component, there has maybe been some choppy performance more recently, and it just feels like there is greater target-date due diligence going on right now.”
