Employers Altering Investment Approaches

By Cyril Tuohy

InsuranceNewsNet

A new survey released by Aon Hewitt finds that employers are boosting returns on retirement savings at very little extra cost through lower fees, and by offering non-mutual fund alternatives and adding passive management strategies to the investment mix.

More than 75 percent of employers said they have taken action to lower costs to their defined contribution plans over the past two years, compared with 50 percent of employers in 2007, the survey of more than 400 plan sponsors found.

Of the companies that lowered costs, 62 percent said they switched to lower-cost mutual fund share classes, and 50 percent said they replaced funds with lower-cost funds or alternatives.

"Plan sponsors are discovering there are many cost-effective ways to significantly increase participants' savings through reviewing and improving basic components of the plan," said Rob Austin, director of retirement research at Aon Hewitt. "In many cases, relatively minor changes in plan design can greatly benefit plan participants' efforts to improve their retirement future."

Cutting investment charges by 0.25 percentage points, from 1 percent to 0.75 percent per year, for instance, is the same as boosting the contribution by 0.50 percent, he said. Over time, the change translates into thousands of dollars.

The survey revealed a shift toward a flat rate to pay for record-keeping fees and away from fees based as a percentage of assets. A $50 flat rate, for example, is cheaper than charging a percentage of assets as the asset base of a contributing participant grows each year.

Defined contribution plan costs have been under a microscope over the past couple of years, ever since the financial crisis sent a rude wake-up call to investors about how unprepared many are for retirement.

The number of companies adding nonmutual alternatives to the mix – collective trusts and separate accounts, also known as “institutional funds” in investment industry parlance – has also grown, the survey found.

More than 90 percent of employers surveyed offered at least one such option in 2013, up from 59 percent in 2007. Institutional fund alternatives are prevalent among funds with more than $1 billion in assets, the survey also found.

“Lower-cost institutional funds can substantially benefit participants because their fees are usually 30 to 50 percent lower than retail mutual funds,” Winfield Evens, director of outsourcing investment strategy at Aon Hewitt, said in a statement.

Institutional funds, which benefit from lower costs as the asset base grows, are more common among defined benefit plans.

The 400 defined contribution plan sponsors surveyed represent more than 10 million employees in plans totaling $500 billion in retirement assets.

Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].

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Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at [email protected].