Fee disclosures could put the squeeze on 401(k) fund firms

Asset managers that provide investments and nothing else may feel pricing pressure from index funds, plans sponsors

Feb 13, 2012 @ 4:00 pm

By Darla Mercado

The Labor Department’s 401(k) fee disclosure could crank up the heat on investment-only and bundled service providers to start cutting back on costs.

The DOL rules, which require service providers to retirement plans to spell out their fees and services to plan sponsors, take effect on July 1. And that news is generally not good for asset managers, according to a report by Moody’s Corp. Moody's called the development a “credit negative” for managers such as Fidelity Investments, Franklin Resources Inc. (better known as Franklin Templeton Investments), Invesco Ltd. and Janus Capital Group Inc. Plan sponsors are going to be encouraged to search for cheaper investment products, which could eat into the business of fund firms that charge higher fees.

Low-cost providers such as The Vanguard Group Inc. and Charles Schwab & Co. Inc., however, should gain from the new rules, noted Neal M. Epstein, a vice president and senior credit officer at Moody’s.

The power of fee disclosure hurts asset managers in a number of ways.

For starters, retirement plans will likely lean toward choosing more indexed mutual funds — and turn away from actively managed funds — to lower fees. As a result, those firms that only provide investments to defined-contribution plans and don’t offer administrative or record-keeping services may lose some of their market share, Mr. Epstein predicted.

He noted that Invesco and Janus are two fund firms that are investment-only providers to defined-contribution plans. “To the extent they’re offering active funds, if bundled providers can find cheaper products, they may lose some market share,” Mr. Epstein said.

But Invesco spokesman Ivy McLemore disagreed. "Both active and passively managed offerings may be suitable investment options in DC plans," Mr. McLemore said. "And many leading investment consulting firms may advise plans to offer a mix of low-cost passive funds and traditional actively managed funds when designing a DC plan menu, or when constructing a custom target-date offering."

Janus had no comment on the Moody's report.

Bundled service providers, or firms that provide administrative and record-keeping services, as well as investments, are also going to feel the pinch, especially when it comes to smaller retirement plans.

Less-sizeable plans tend to rack up greater all-in costs. Indeed, data cited by Moody’s from the Labor Department and Deloitte LLP show that plans with less than $1 million in assets are paying an all-in median fee of 1.41%. That fee goes down to a median of 0.38% for plans with more than $1 billion in assets.

Registered investment advisers and third-party administrators that can create open-architecture solutions for small plans may begin competing with the likes of bundled-service providers such as Fidelity, Mr. Epstein said.

“Bundled providers on the large-plan end of the market have probably made the pricing as efficient as they can,” he said. “But TPAs that create open architecture solutions for small businesses will be most aggressive in finding new options.”

Fidelity was not able to provide comment by press time.

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