The Evolution of Investment Vehicles Presents an Opportunity


During the August edition of the PLANADVISER Practice Progress 2022 webinar series, two experts who have long embraced mutual trusts, exchange-traded funds and separately managed accounts as investment options emerging markets discussed the rapidly changing market for investments in defined contribution plans.

Research from companies such as BrightScope and Cerulli Associates shows that key DC plan decision makers, including advisors and consultants, continue to favor mutual funds, largely due to their relatively low cost structure. and their pricing flexibility, the speakers noted. Today, 401(k) plan assets in CITs have surpassed the $2 trillion mark, and growth is expected to accelerate as more investors jump in and the whole products from DC diets is growing.

CITs already dominate the market for large plans, especially in target date funds, according to the data, but many CIT providers have recently lowered their investment minimums and, in some cases, abandoned them altogether. Cerulli’s reports indicate that those with low or no investment minimums are more viable investment options for smaller plans – and that advisors can help promote stronger market adoption, where higher fees are charged. investment remains a pressing issue.

Faron Daugs, founder and CEO of Harrison Wallace Financial Group, said the use of ETFs also continues to increase and his company is slowly but surely moving away from mutual funds. Daugs’ business, above all, focuses primarily on individual and family wealth management. His perspective on investment options is therefore different from that of a typical DC advisor.

“As we sort of dissect our clients’ portfolios, we look to give them exposure to things like sector type funds or even sub-sector funds. We may want them to have exposure to technology, for example, but more importantly, we want them to have that targeted exposure to cybersecurity or artificial intelligence,” Daugs said. “For our individual customers, it’s been a benefit to have something that can actually be a bit more concentrated. We can target semiconductors or cybersecurity through a single ticker.

For their part, mutual funds have seen substantial price compression, Daugs said, and they remain important investment vehicles. But in the individual and family planning market, the allure of intraday trading has driven ETFs forward.

Brent Sheppard, partner and financial adviser at Cadence Financial Management, noted that intraday trading is not a thing for pension plans. He agrees that ETFs play an important role on the retail side, but he’s not sure they’ll be as beneficial to pension plan clients, especially if CITs are introduced to plan sponsors to reduce fees.

Client investments

When it comes to whether or not his clients understand the specific investment vehicle they’re in, Daugs said the majority of his clients want at least a general knowledge of what they own. He typically meets with his clients at least once every six months to “give them a little taste of what’s under the hood.”

“If I know they’re still going to Starbucks, for example, then I can say, ‘Oh, by the way, this fund owns Starbucks.’ They feel good about it,” Daugs said. “So from that perspective, I think they kind of want to know at least a little bit about what they own.”

Daugs also tries to get his clients to maximize their DC plan contributions as much as possible, while educating them about their investments in their 401(k) plan. It tries to treat all client investments as one portfolio.

“We will often treat the client’s 401(k) investments as the core of their retirement strategy,” Daugs said. “Then with the other outside investments that they have with me, maybe we’re building more of a satellite portfolio to bring in some of these sector ETFs. Maybe we’re going to be a bit more tactical with the outside investments. They understand that we treat everything as a whole.

Retirement planning Financial health

There are many different investments available in retirement plans, but when acting as trustees, most advisers try to keep the range fairly simple for participants, Sheppard said. He also noted how, while there is still a coverage gap in the United States, companies sponsoring plans have had great success moving the needle with auto-enrollment and auto-escalation.

“There are so many useful tools and technologies out there,” Sheppard noted. “However, building a truly individualized financial plan for the masses is difficult. Scalability remains a challenge.

Sheppard cited data from an industry survey that shows only about 50% of employees who don’t have a financial advisor or financial wellness program believe they’re in good financial shape. excellent. Similarly, 50% of those without advisors or plans are able to easily pay off their debts.

“If you put in place a financial advisor and a financial wellness program, 93% of employees were in good to excellent financial condition,” Sheppard noted. “If you can get employers to work on financial wellness programs and convince them of the importance of engaging financial advisors with employees, that adds a ton of value.”


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