Workplace investment plans often have lower pricing

The Baltimore Sun

If 401(k) plans were soda in the grocery aisle, the store brand would be crowding out Coke and Pepsi these days.

More company retirement plans are dumping retail mutual fund offerings to save costs, and it is often savers themselves reaping the benefits, experts say. Still, investors need to be aware of a few caveats.

Driven by increased scrutiny of 401(k) plan fees, including congressional hearings and a Government Accountability Office investigation, just 54 percent of plans offered retail funds in 2006, down from 64 percent two years earlier, according to research conducted by Greenwich Associates, a financial services industry consultant.

In their place, workplace plans are introducing investments with similar asset allocations and goals that offer lower pricing. Usually, the investments look nearly identical to the holdings of the mutual funds they replace, but they carry lower regulatory requirements and typically charge lower expense ratios because of the large groups, or pools, of investors they serve.

Often, multiple employers will invest in these funds to take advantage of the lower pricing. Some have a mix of retail mutual funds and proprietary investments.

Some employers, typically those with many workers, offer these fund-like investments as separate accounts managed exclusively for their plans.

By 2006, according to Greenwich, 41 percent of corporate plans offered these pooled investments, which are called commingled funds or collective investment trusts, up from 34 percent in 2004.

The investments have legal structures separate from retail funds that allow them, among other things, to set fees according to the size of assets in a plan, which can drive costs down.

They lost ground to mutual funds before the advent of the Internet because workplace savers liked the ability to look up daily fund prices in newspapers.

Today, however, the majority of the institutional investments are priced daily, and that information is typically available on the Web sites of plan administrators, experts said.

Morningstar Inc. also offers information on nearly 800 collective investment trusts and separate accounts, which participants can access through their plan administrators.

Still, there are some factors to be aware of and questions to ask if your retail mutual funds are being replaced, experts said.

For starters, transparency is an issue, said Steven Deutsch, director of separate accounts for Morningstar.

While Morningstar has collected a sizable amount of data on the investments it is tracking, it has net-return information (returns after expenses) on relatively few, Deutsch said.

And if it is not spelled out, participants should inquire how the plan's investment committee went about selecting who will be providing the new fund, Deutsch said.

Often, the replacement fund is run by the same company, but that doesn't guarantee the same portfolio manager will construct the new portfolio, he said.

And while the stock holdings in the new portfolio will look very similar to the old fund, they won't necessarily be identical, said Philip Suess, principal with Mercer Investment Consulting in Chicago.

The manager of the new fund is "buying securities at different times [than the retail fund did], so, because of appreciation, you might not want to be putting new cash into a particular holding, and the manager might have new ideas," he said.

Don Stone, president of Plan Sponsor Advisors in Chicago, said these institutional investments are overseen by the Office of the Comptroller of the Currency.

"Some people have been concerned that oversight is not as great, but history has shown this has not been an issue," Stone said.

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