How Do Money Managers’ Own 401(k)s Compare?

There has been a lot of litigation in recent months alleging excessive fees and an imprudent reliance on proprietary funds by asset managers' own 401(k) plans. But a new study finds some interesting differences in plan design and participation.

The findings are captured in a recent white paper from researchers at the Callan Institute, “The Cobbler’s Shoes: How Asset Managers Run Their Own 401(k) Plans.” Using data from the 2016 Form 5500 database, the research identified areas in which manager-sponsored plans did exceptionally well compared with a broad universe of 55,000 DC plans – and other areas in which the practices of managers differed from the industry consensus on running 401(k) plans.

The researchers found that asset manager-sponsored 401(k)s had:

• Higher average balances. The average balance across the 157 asset manager-sponsored plans in the sample was $179,171 – roughly four times that of the average balance for the broad population of 55,000 plans ($42,394). Furthermore, the 90th percentile lowest average balance across the asset manager-sponsored plans ($74,844) would have ranked in the top quartile within the broad population. Doubtless this trend benefits from what are almost certainly higher compensation levels compared to a broader sampling, and which doubtless also led to…
• Higher employee contributions. The average employee contribution in asset management-sponsored plans in 2016 ($7,187) was roughly three times that of the broad population.
• Higher employer contributions. The average employer contribution for asset manager-sponsored plans in 2016 ($5,938) was almost five times that of the broad population. 
• Interestingly enough, 8 of the top 10 firms in terms of average balances and in terms of employer contributions in 2016 were privately held.

Among the plan design differences were:

• More fund choices. The average plan in the dataset offered 43 investment options (the median was 39), including 12 separate U.S. equity options. The plan with the greatest number of choices offered 250 options (this by a recordkeeper firm that, the researchers note, “generally advises its clients to pursue streamlined investment structures”). This trend was persistent across the dataset, with only 15 plans offering fewer than 20 choices.  
• (Not so much) TDF adoption. The average allocation to target date funds (TDFs) across asset manager-sponsored plans was only 12%, well below the 32% allocation observed in the broad population. Doubtless those who manage money for a living (or work for those who do) may well consider themselves better able to actively manage a retirement portfolio than the broader population. And then again, it maybe that those who decide the options feel that way; of the plans in the Callan dataset, 30% did not offer TDFs at all in the 2016 plan year – and the maximum allocation to TDFs across the 157 plans was only 49%.
• More active management. The average allocation of non-TDF assets to actively managed strategies was 73% for investment manager-sponsored plans, versus 55% for the broad population of large plans represented in the Callan DC Index.™ Three-quarters of the plans in the dataset allocated 63% or more of total non-TDF assets to actively managed strategies.

Proprietary Expenses?

Not surprisingly, of the 157 investment manager-sponsored plans, 92 offered proprietary products managed by the firm (it may actually be surprising that “only” 92 did).

Allocations to proprietary products within this group ranged from roughly 1% of plan assets to 97%. The average was roughly 34%. However, despite the claims in recent litigation, Callan says it found no relationship (what researchers call “zero correlation”) between the use of proprietary products and the weighted average investment expense for plans.

In fact, Callan noted that the weighted average investment expense ratio across all of the plans in this dataset was 0.53% – a result one of the report authors called “notable” since the plans evaluated were generally under $500 million in assets, and their participants tended to “make extensive use of active management.”