Mark Chapman
Back to basics: Chapman aims to keep dialogue on the straight and narrow

Regulators and lawmakers are focusing on making 401(k) plans more transparent and less costly to US investors. In that sense, adviser Mark Chapman believes he is ahead of the curve.

He is corporate retirement plan director at Graystone Consulting, which is part of Morgan Stanley and based in Sacramento, California. Mr Chapman emphasises to both plan sponsors and participants the value of picking low-cost funds. As a result, 85 per cent of his clients’ defined contribution (DC) plan assets use exchange traded funds.

By comparison, a typical member of 2016’s FT 401 list of top US advisers has about 2 per cent of plan assets in ETFs. In fact, just 26 per cent of that elite group do any business with such funds. Far more popular are long-term mutual funds, which are used by a third of such top DC consultants.

ETFs’ share of the market may be very small but appears to be set for growth. At the beginning of the year, ETFs accounted for less than 1 per cent of the $4.5tn held in US 401(k) plans, according to market researcher Cerulli Associates. Meanwhile, mutual funds held $2.2tn — or nearly half — of the entire domestic retirement plan market.

“We think a key for helping participants succeed with their retirement goals is to use low-cost ETFs and passively managed strategies,” says Mr Chapman, whose practice manages nearly $1bn, about half of which is through DC plan sponsors.

Besides ETFs, he also recommends index mutual funds and passive target-date retirement funds to plan administrators. A typical index-based ETF now has a net annual expense ratio of 0.56 per cent, according to investment researcher Morningstar. An average actively managed mutual fund in the US charges 1.21 per cent.

By using index-tracking ETFs, Mr Chapman argues he is better able to answer clients’ ultimate question: “How much do I really need to retire?” Keeping plan sponsors and participants focused on passively run funds, he says, avoids “tangents” that can divert their attention from what is most important in assembling a strong line-up of investments.

“Instead of getting into answering questions about who’s the best active manager in each category,” says Mr Chapman, “I try to keep the dialogue on what really affects change over time in terms of investment performance — how much someone is contributing and for what length of time.”

Still, industry experts point out that even the nimblest DC plans have been slow to tweak their back office systems to handle ETFs.

Matt Cirillo, senior analyst at New York-based research company Strategic Insight, says that is changing as regulators put emphasis on creating “a more fiduciary-friendly regulatory environment”.

“The cost advantages of ETFs are going to be hard for the DC industry to ignore over the longer-term,” says Mr Cirillo.

Mr Chapman reports double-digit annual average growth over the past five years in plans he serves. “We don’t see ETFs as a tough sell at all these days,” he says. “Once we show plan sponsors how well-diversified and low-cost of a line-up we can build, it’s a home run.”

Whether adoption rates pick up quickly or not with institutional investors, Mr Chapman believes ETFs and other passive funds are going to grow in prominence in DC plans.

“Passively managed funds are simply a sharper tool we use to help our clients reach their long-term objectives,” he says.

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