401(k) advisers choosing to work with fewer asset managers

Fee compression and a shift to passive management have contributed to the trend

Nov 11, 2019 @ 4:59 pm

By Greg Iacurci

Retirement plan advisers are choosing fewer investment firms to manage their clients' 401(k) assets than they have in the past, which poses a distinct challenge to some asset managers, especially those specializing in active management.

According to Sway Research, which studies asset management in retirement plans, about half of retirement plan advisers now work with fewer investment firms.

The trend toward fewer managers is a byproduct of the shift toward greater use of passively managed investment strategies in 401(k) plans and advisers having fewer resources as a result of fee compression, said Chris Brown, founder and principal of Sway Research. Retirement plan advisers rank fee compression as their top challenge today while resource constraints ranked No. 3, according to Sway data.

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While there are several firms that advisers often turn to for active management in a particular asset class, there is a smaller roster of index-fund providers that advisers use, Vanguard Group and BlackRock Inc. being the most common, Mr. Brown said. A shift away from active, especially in domestic equity blend funds and target-date funds, therefore results in a shorter list of investment firms overall.

"It was an active world for advisers — they mostly sold active assets for most of their careers," Mr. Brown said. "And things have shifted toward much more of a passive focus. They're abandoning some managers in certain asset classes."

Five years ago, passively managed portfolios held 29% of 401(k) assets. Today, they hold 39% and will likely reach 48% in 2023, according to Sway data.

Increased outsourcing of fiduciary investment responsibilities by advisers to firms such as Morningstar Inc., which select an investment lineup and use it across multiple 401(k) plans, have also contributed to the trend, advisers said. There's a similar result for advisers joining so-called aggregator firms, since those firms often whittle down the roster of investments their advisers are allowed to use with 401(k) clients.

Overall, 48% of retirement plan specialists — which Sway calls "retirement/benefit consultants" — and 58% of more general 401(k) practitioners use funds from fewer investment-management partners. Sway didn't quantify the exact number.

Specialists surveyed by Sway advise on an average of $1.1 billion in defined-contribution assets and generate 80% of annual revenue from DC plans. The more general advisers have $120 million in defined-contribution assets and get 40% of their revenue from DC plans.

Some advisers have culled their roster of managers to adjust to an environment of lower fees for their services. Doing so allows advisers to spend less time vetting investment managers.

"There aren't a lot of ways you can gain efficiency in this business," said Aaron Pottichen, a senior vice president at Alliant Retirement Consulting. "Having a standardized menu is one way."

Average advisory fees for a $100 million 401(k) plan decreased by 9% in 2018 from the year prior, according to Fi360, a fiduciary consulting firm. The fee — around $71,000, or 7 basis points on plan assets — has declined 20% since 2013.

Aggregating retirement assets with a few investment managers has other benefits for advisers. Some firms, for example, give advisers access to lower-cost share classes —perhaps an institutional versus retail share class — for their funds if they carry a certain asset total with those managers, Mr. Pottichen said.

Advisers may also receive better service and attention from investment firms if they put more 401(k) assets with a certain provider.

"It's kind of like the loyalty programs at the airlines," Mr. Brown said.

Some question whether advisers can fulfill their fiduciary duties to 401(k) clients by limiting their investment partners.

Ellen Lander, principal and founder of Renaissance Benefit Advisors Group, believes they can't. Her firm "starts fresh" with each new client when it comes to analyzing their investment menu. She doesn't determine which asset managers to use in a particular 401(k) plan until getting an idea of the employer's investment philosophy and demographics of the employee population.

"The approach of having a list of four go-to managers is very efficient," Ms. Lander said. "[But] when a client hires us, it's not so our life can be easy."

Having a list of go-to asset managers doesn't necessarily mean advisers aren't fulfilling their fiduciary roles, Mr. Pottichen said. Advisers who use an investment policy statement with 401(k) clients can fulfill their fiduciary duty by selecting a standardized investment menu fitting all the criteria in that statement

"We'd rather spend our time on other things [like participant education] than chase the best-performing asset manager," Mr. Pottichen said.

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