What’s Top of Mind in Investment Menu Shifts?

A new report finds that investment menu shifts aren’t being driven by performance.

A new blog post by Linda York, senior vice president who leads the Wealth Management Syndicated Research & Consulting practice at Market Strategies, notes that in instances where plan sponsors say they intend to drop or reduce the number of investment options provided by specific investment managers, the most common reason – for the second year in a row – was the desire to reduce fees/expenses. (Performance did rank second, however.)

Citing findings from Cogent Reports Retirement Planscape, she notes that “Large-Mega” plan sponsors are more likely than their peers with smaller plans to drop a manager due to asset class risk attributes no longer meeting requirements (26%) or to switch from an active manager to a passive manager (22%). The research also found a “significant increase” in the percentage of plan sponsors who would drop an investment manager because of negative media perception, driven by respondents in the Micro plan segment.

Overall, 7% of plan sponsors intend to add at least one manager to their investment lineup in the next year. At the same time, 2% plan to drop a manager and 16% intend to do a combination of adding and dropping managers.

There is a cautionary note in the report: The majority of plan sponsors overseeing the investment menus in their 401(k) plans neither actively engage with nor actively seek information about investment managers on a regular basis. In fact, the report acknowledges what advisors know – that for many plan sponsors, investments are just one of many responsibilities they assume within their organization. York suggests that investment managers would be “wise to focus their efforts on strengthening perceptions among consultants and financial advisors and tailor their direct marketing outreach to an audience that tailor their direct marketing outreach to an audience that is less knowledgeable and more participant-focused than larger, more sophisticated institutional investors.”

The report notes that plan sponsors’ desire to reduce plan costs is substantially impacting their approach to investment menu design and their relationships with DC investment managers, although it acknowledges that the impact of the resulting activity varies by plan as well as by asset manager.

Asked specifically about the managers they will continue to use, 29% of plan sponsors intend to award new business to existing firms while only 15% plan to pull business away—trends that York sees as evidence that plan sponsors are concentrating their assets with the smaller number of managers they know.

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