PLANADVISER - May/June 2021 - 25

cover story | investments
to move into the middle market, giving midsize sponsors
an opportunity to reduce expenses while continuing to
provide their participants with diversified offerings.
" Over the last five to seven years, we've really seen the
institutionalization of CITs, " Geraci says. " The minimums are
being waived, and we're seeing [the investments] added to
recordkeeping platforms, so there is broad availability. Some
of them have tickers now, so you can pick them up as an
investor and look at them on Morningstar or Google Finance. "
CITs are the second-most prevalent investment option,
after mutual funds, in today's 401(k) plan, with 78% of plan
sponsors using them. That is an increase of about 25% from a
decade ago, according to Callan. The shift reflects a decrease
in prices, making CITs less expensive than mutual funds
while offering the same strategy equivalent, Geraci says.
A Blend of Active and Passive.
Plan advisers say the pendulum continues to swing back
and forth between plan sponsors wanting more active or
more passive investments.
" Cost pressure and perceived fiduciary benefits have put
a wind behind the sails of passive management in recent
years, " Shamburger says. " But plan sponsors also have to
understand that it's not simply about managing the expense
side. They also have to pay attention to returns. "
Most sponsors have not
entirely abandoned active
management. Instead, they increasingly offer blended options
to their participants, or focus on one approach or the other
depending on the asset class. The case for active management
in efficient markets such as large-cap domestic equities,
for example, might not be as compelling as the case when it
comes to bond funds or emerging market stocks, Smith says.
As to selecting active managers, plan sponsors increasingly
look for proven track records and best-in-class performance,
Shamburger says.
" There used to be all of these stats that passive investments
were outperforming active, but what we [ultimately]
saw was there was a huge universe of active management, "
he adds. " If you just look at the top funds and the
top managers, you would see outperformance. People are
getting more selective about choosing the active managers
they work with. "
Three Tiers
Some advisers take a tiered approach when considering the
plan menu, guiding sponsors to think about their offerings
in terms of three separate levels of participant experience.
The first tier is the default option, typically a target-date fund,
aimed at younger participants and hands-off investors who
prefer not to take an active role in their investments.
The second tier provides the building blocks for more
" do-it-myself " investors, providing a handful of funds across
asset categories, which they can use to construct their own
category. This tier may also include a brokerage window if
plan participants tend to be more sophisticated investors.
The third tier is aimed at in-plan retirees. It focuses on
helping them convert their savings into income.
DIGGING INTO
PARTICIPANT DATA
LIKE NEARLY every other industry, the world of 401(k)s has
undergone a digital revolution in recent years, leading
to the availability of far more data about plans, participants
and their behavior than ever before.
" Data isn't something that plan sponsors asked
about with the same frequency 20 years ago as
they do today, " says Winfield Evens of Alight Solutions
LLC. " Plan sponsors as a group spend a lot of effort
designing their plans. They want things to turn out well. "
Plans increasingly take advantage of such data to
make decisions about their plan lineup, Evens says.
For example, if the data show that only a handful of
participants have chosen to invest in a given fund,
that might prompt a plan sponsor to consider eliminating
that fund in favor of another that might appeal
to more participants. Or, if it becomes clear that many
participants are inadequately diversified or otherwise
taking on too much risk, a plan sponsor might consider
investing in education or other materials to help nudge
these people toward better decisions.
" Plan sponsors' focus these days is less on menu
design and more on the outcomes for participants, "
Evens says. " The focus now is on how funds are being
used and how people are building up assets but not
spending them down. " -BB
Managed Accounts
Whether or not they use the tiered framework, plan sponsors
increasingly are working with their adviser to introduce
managed account options that recognize the heterogeneity
of plan participants. While a target-date fund may be the
best solution for most participants, managed accounts aim
to serve those who may have a more complicated financial
picture. This could mean a participant who has significant
savings outside of the plan or those making the financial
transition into retirement.
" Managed account solutions are a way to address the
limitation of the target-date fund, " Herman says. " Targetdate
funds are the same for any person who chooses a
[particular] vintage. The managed accounts solution is a
recognition that we could do better if we know more about
the participant. " -Beth Braverman
planadviser.com May-June 2021 | 25
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PLANADVISER - May/June 2021

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