August 21, 2000
Mutual fund companies should take note of 401(k) plan sponsors' growing interest in co-mingled funds, a defined contribution alternative to mutual funds that offers lower fees, according to industry executives and consultants.
Co-mingled funds are products offered by investment companies that bridge the gap between separately-managed accounts and retail funds. Each co-mingled fund is usually only offered to three to ten corporations, each of which has enough employees to contribute $20 million or more at the outset to the fund.
Plan sponsors' interest in co-mingled funds is definitely growing, according to Cerulli Associates of Boston. Four years ago, about 23 percent of defined contribution assets were in these vehicles and that has grown to 30 percent by the end of 1999, according to Cerulli. At the same time, retail funds' share of the defined contribution market has decreased slightly from 35 percent in 1996 to 33 percent at the end of last year, according to Cerulli.
Unlike retail funds that include non-401(k) money and therefore have unpredictable asset flows, co-mingled funds have stable 401(k) money flows, said Trisha Brambley, president of Resources for Retirement Plans of Newtown, Pa. Co-mingled funds can therefore keep less cash reserves than regular retail funds, which need to have the cash on hand for redemptions, Brambly said. Co-mingled funds are also not as tightly regulated as mutual funds, said Meredith Brooks, managing director of institutional investment services in the New York office of Frank Russell Co. of Tacoma, Wash.
"While many mutual funds have limitations to the amount that can be invested in any one stock, for example, the regulatory regime for co-mingled funds is far less restrictive, and the board of directors can make exceptions to this and many other things," Brooks said.
Performance is also much more consistent than retail funds, which are prone to style drift, said Wade Fox, investment product manager at New York Life Benefit of New York.
Also, because co-mingled funds are not sold to the general public or through distributors, they can charge much lower fees - an average of one percent lower than regular funds, said Brooks. Over 30 years, that could add up to several hundred thousand dollars in a single 401(k) account, Brooks said.
Many plan sponsors and participants also prefer co-mingled funds because they are usually recommended by an outside consultant who is more knowledgeable about selecting a retirement savings plan than a human resources department, Brooks said.
"Investors like co-mingled funds because they know that the duty of care in selecting such a fund is much higher than in selecting a mutual fund available to the general public," Brooks said. "The consultant who suggests a co-mingled fund has really pored over the investment."
Co-mingled funds are also less expensive for plan sponsors to offer, Brooks said.
"Because there is more flexibility in the way fees are charged, the plan sponsor can pass some of the fees onto the participant," Brooks said. "Co-mingled funds allow for more creative revenue-sharing than regular funds in a DC [defined contribution] plan."
Plan sponsors and participants who at one time shied away from co-mingled funds because their net asset values are not listed daily in newspapers along with regular funds, are now able to find those values posted on the Internet, said Fox of New York Life Benefit.
"Technology has made it possible for people to check the NAVs of their co-mingled funds daily," he said.
MacKay Shields Financial Group of New York began offering three co-mingled funds in the beginning of this year, said Peter Zinam, marketing director at the firm. These funds have attracted $10 million in assets and MacKay Shields is already planning to offer more, Zinam said.