Money Managers’ Own Plans Have Higher Balances, More Choices

Asset manager 401(k) plan balances are four times that of the general population.

How well do the companies that manage the investments of 401(k) plans steward the retirement plans for their own employees? Consulting firm Callan analyzed the characteristics of 401(k) plans sponsored by 157 asset managers representing over $200 billion in plan assets, and compared that dataset to a broader population of 55,000 plans.

“Their employees are investment professionals and presumably more engaged (and potentially vocal) about the design of their plans,” Greg Allen, CEO of Callan, said in a release.  “They are also faced with the interesting question of employing products managed by their competitors, or in some cases, employing their own products. Ultimately, we were interested to see how these factors affected plan design and whether it resulted in meaningful differences from the broader population.”

Callan’s analysis revealed that asset manager plans are distinctive in some key areas, such having significantly higher average balances—four times higher than those in the broad universe of defined contribution plans—as well as higher employee and employer contributions. Asset managers also offered, on average, a significantly higher number of investment choices than current industry practice, and their plans tended to be more complex than the plans of the broader population.

Asset manager plans also used far fewer target date funds than the broad population, with nearly one-third (30%) of the plans in the dataset not even offering them.  At the same time, active management was used more frequently in manager plans than in a broad universe. However, the study found that the managers in the dataset used Vanguard more than any other asset manager, which suggests that they haven’t ruled out offering passive management strategies.

“Overall, the investment management industry scored high marks on the two most important retirement savings success metrics: high contribution rates and in turn high average balances,” said the report. “Generous matching policies, profit-sharing, high salaries, and long employee tenure all contributed to these successful outcomes.”

However, the study found that results were more mixed when evaluating plan design compared with industry best practices. The report found that in contrast to the current industry consensus, asset managers generally embraced complexity over simplicity in their investment designs. They also had relatively high usage of brokerage windows.

The report said that the prevailing philosophy for the industry seems to be that its participants are sophisticated investors and should be given a broad universe of choices.

“While this philosophy may be the right one for portfolio managers and other highly compensated investment professionals, it is not clear from a fiduciary standpoint that it should be extended to the broad population of DC plan participants,” said the report.

Callan also said that most large defined contribution plans have moved away from the unsupervised “mutual fund supermarket” model, and toward a streamlined, highly supervised approach in which every option has a specific purpose.

“It will be interesting to see whether the increasing litigation pressure being exerted on investment management-sponsored 401(k) plans will cause them to migrate in a similar direction,” said the report.

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