Skip to main content

You are here

Advertisement

READER POLL: Fund Fees, Style Drift, and TDFs

Industry reports suggest that fund fees are falling. What are NAPA Net readers seeing – and how is that playing into menu design, target-date fund selection, and communications with plan sponsors?

Consider that Morningstar’s annual study of U.S. open-end mutual funds and exchange-traded funds found that 2016-2017 was the largest year-over-year decline in fees recorded since the firm began tracking the trend nearly two decades ago. The Investment Company Institute similarly finds that the average expense ratios of equity, hybrid and bond mutual funds – including both actively managed and index mutual funds in these asset classes – have trended downward for more than two decades.

And, asked about their experience, a whopping 81% of this week’s NAPA Net reader poll respondents say fees have been trending lower, and the rest said they had been trending lower for some funds.

Talking ‘Points’

Certainly the issue of fees – and litigation about fees – has been in headlines of late, so we asked readers if their plan sponsor clients were asking more about fund fees now than two years ago. Turns out that 40% of respondents note that some are, and another 27% say they are, and 13% responded that they weren’t really. The rest said their clients weren’t asking more, because they had always asked about fund fees. “Yes and no,” explained one reader, “specifically, share classes and reminding them how their plan is set up to pay expenses.”

“We go in depth on revenue sharing more frequently with clients due to the constant release of new share classes,” explained another.

Similarly, asked if they are talking more with plan sponsors about fees than they were two years ago, 4 in 10 say they have always talked about fees, and just over 1 in 8 (13%) say they haven’t really. However, more than a quarter (27%) have, including the reader who explained, “With so much media proclaiming that ‘lowest cost is best’ as fact, which is a bunch of nonsense, I bring certain topics up regarding fees to help educate plan sponsors on reality. Additionally, bringing up this information is a defensive move. If I’m not talking about it to some degree then some novice advisor could potentially get my clients attention with scare tactics about lowest cost. Two positive outcomes of the focus on fees are that more plan sponsors are becoming aware of what they’re paying and they’re becoming more educated about fees as experienced consultants are taking the time to teach them.”

Passive Activity?

Since it’s about more than just fees – and because there are indications that there has been a shift to passive alternatives at least in part because of fee concerns – we asked readers if they were recommending passive options more these days. The results, somewhat surprisingly, were mixed:

47% - No, I’ve always been inclined to recommend passive fund options when appropriate.
30% - Yes, primarily because plan sponsors are more interested/asking about them.
23% - Not really.

“We don't recommend active vs passive but rather have a discussion of the merits of each,” explained one reader. “That said, we do recommend that clients offer both.”

“We always recommend a full lineup of passive options alongside active options for our clients,” noted another respondent.

Drift Shifts?

While we were on the subject, we also posed a reader-provided question: When designing a core fund lineup, is style purity of the assets classes a strong factor (i.e., small cap value, small cap growth) or do you prefer to let the fund managers “drift” based on where they see the market going? The results:

42% - Depends on the fund/class.
33% - Yes, it’s a strong factor.
13% - It’s a factor, but not a strong one.
7% - Depends on the fund manager.

The rest fell into something of an “other" category. “Yes, but within reason,” explained one reader. “I’m fine with a fund drifting some, but not so much that it's technically in a different asset class.”

“We try to diversify based on categories and try to provide no overlap in mutual fund categories,” noted another. “It’s a strong factor in equities, but not as much in the fixed income offerings,” clarified another.

Target Ranges

Speaking of passive shifts, we noted that an increasing reliance on indexed funds may be contributing to lower fees for target-date funds. For example, Morningstar notes that fees for TDFs continued their multiyear downward trend in 2017, and that the average asset-weighted expense ratio fell to 0.66% at the end of 2017, a notable decrease from 0.91% just five years earlier. Here again, a downward trend in fees was evident: Two-thirds of respondents said they had noticed a downward trend in TDFs, and the remaining third acknowledged a downward trend among at least some funds.

“Yes, fees continue to drop,” said one reader. “Fee pressure seems to be influencing fund managers to opt for more passive exposure in TDFs in order to reduce costs.”

“I think the main issue in our industry is that fund fees are being lowered but recordkeeper fees have either stayed the same or gone higher,” explained one reader. “The recommendation on passive funds and lower passive expenses I think are created by the recordkeeper wholesalers pushing passive funds to give a false sense of lower plan expenses.”

“I think before we can talk about lower expense trends we need to address the major issue or expense when it comes to 401(k) plans,” commented one reader. “Recordkeeper expenses have in a sense stayed the same. In most cases they are the most expensive line item for a 401(k) plan. Most will play games with stable value or target date funds to create false low expenses. Most record keepers are not truly agnostic.”

“I am concerned with the increasing pressure to reduce fees at all costs,” wrote another. “Are fund managers taking shortcuts in order to achieve the lower cost threshold? Increasing index placement when research does not support the move? At what point does a shift to passive begin to increase total risk exposure of the portfolio, or change expected risk allocation unexpectedly due to market cap shifts?”

Thoughts?

Thanks to all who participated in this week’s NAPA Net Reader Poll!

Advertisement