“We have been researching the defined contribution plan market for more than two years and have been surprised to find that even many of the largest plans do not use the available leverage to obtain the best deal for plan participants,” said RiXtrema President
The research used the same algorithms available in RiXtrema’s 401kFiduciaryOptimizer, a quantitative diagnostic software solution for retirement plans. “The 401kFiduciaryOptimizer is the first and only software that uses sophisticated quantitative methodologies to improve menu design for retirement plans,” said Satchkov. “We have devoted years of research to ensure that plan advisors can bring science-based savings and improved diversification to retirement plans.”
RiXtrema analyzed 52,529 retirement plans from the
While similar to an earlier study release in 2016, the current study included two significant enhancements: a dramatic six-fold increase in the universe of plan forms, from 7,472 to more than 50,000; and the addition of a strict criterion that allowed the consideration of only high-quality funds as low-fee alternatives to the universe of expensive incumbent funds.
“In the current study, only funds with a better ten-year track record than the incumbent funds were allowed to be used as replacements to obtain the savings,” said Satchkov. “We also reran the analysis removing index funds and ETFs. The plan savings remained extremely high, in spite of the additional criteria.”
Based on a conservative analysis, it is estimated that plan participants could save on average .25% per year (25 basis points) by switching to lower cost investments that are quantitatively very similar to those they already hold, but with a better track record. Similarity is defined as a combination of category filters, together with historical and forward looking predicted-correlation based on a multi-factor model. With total defined contribution plan assets of $6.8 trillion (as of
REASON FOR RESEARCH
It has been widely argued that 401(k) and other retirement plan participants are poorly served by plan menus comprising expensive mutual funds that tend to underperform over time due to higher fees and lack of consistent alpha. Until now, there has been surprisingly little quantitative evidence regarding fee inefficiency and waste in retirement plans. In its analysis, the DOL used an average of 11.3 basis points as an estimate of waste in 401(k) plans. An independent study indicated that menu restrictions in an average plan led to 78 basis points of additional cost relative to a low index fund basket, but that study could be challenged based on the argument that high fee funds held by participants should not be directly compared to low cost funds due to the unique return and correlation profile.
RiXtrema’s research objective was to find low fee replacements for high fee funds, but only where it could be proven that 1) the replacement does not materially change the risk/return profile offered to participants in their current menu and 2) that the track record of that fund is actually better on a ten- year basis, than the track record of the incumbent fund.
Founded in 2010, RiXtrema is a portfolio crash-testing company that helps advisors discuss risk with clients. Long used by fund managers, pensions plans and funds of funds, RiXtrema has introduced its risk management tools to the financial advisory and broker/dealer community to help ensure that clients get the analysis and advice they need. The RiXtrema research team received the 2015 Peter L. Bernstein award, one of the most prestigious awards in finance, for its article Risk Estimation and Hedging: A Reverse Stress Testing Approach, published in
To view the original version on PR Newswire, visit:http://www.prnewswire.com/news-releases/investment-expense-finds-over-17-billion-of-annual-waste-300438150.html