NEW YORK, Jan. 31, 2017 /PRNewswire/ -- RiXtrema, an industry-leading company that provides risk management tools and analysis to the financial advisory and broker/dealer community to help ensure that clients get the analysis and advice they need, today announced the results of a quantitative analysis of fee inefficiency in 401(k) plans.
"For some time, pressure has been building on plan sponsors to address the issue of fee waste in qualified plans," said RiXtrema President Daniel Satchkov, CFA. "With the new DOL Fiduciary Rule, this pressure is being applied to the financial advice industry as a whole. We undertook this research because we recognize the need for rigorous quantitative evidence to show how much retirees are overpaying in 401(k) plans."
The research used the same algorithms available in the 401kFiduciaryOptimizer, a quantitative diagnostic software 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 diversification improvements to retirement plans."
RESEARCH RESULTS OVERVIEW
RiXtrema analyzed 7,472 retirement plans from the Department of Labor EFAST database. EFAST is an all-electronic processing system of Forms 5500 and 5500-SF which are filed each year by pension and welfare benefit plans to satisfy annual reporting requirements under the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code.
Based on a conservative analysis, it is estimated that plan participants could save on average .44% a year by switching into lower cost investments that are quantitatively very similar to those they already hold. Similarity is defined as a combination of category filters, together with historical and forward looking predicted-correlation based on a multi-factor model. With a 401(k) assets total of $2.8 trillion (as of the end of 2014), there is a potential savings of at least $12.3 billion.
REASON FOR RESEARCH
It has been widely argued that 401(k) and other retirement plan participants are poorly served by plan menus filled with 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 in retirement plans and plan waste. The DOL used an average figure of 11.3 basis points as an estimate of waste in 401(k) plans, but that figure, which was not clearly sourced, has been widely criticized. An independent study indicated that menu restrictions in an average plan led to an additional cost of 78 basis points above a low index fund basket, but that study could be challenged based on the argument that high fee funds held by participants cannot be directly compared to low cost funds due to the unique return and correlation profile.
The goal of RiXtrema's research was to find a low fee replacement for high fee funds, but only where it could be proven that the replacement does not materially change the risk/return profile offered to participants in their current menu.
PATENT PENDING ALGORITHM
The algorithm described in the research, for which a patent is pending, forms the basis of RiXtrema's new 401kFiduciaryOptimizer, the first software to quantitatively compare and convert existing retirement plan menus into proposed, lower fee, better diversified lineups.
James Duffy, Chair and Managing Director at Park Avenue Strategic Partners, who learned of the software through RiXtrema's affiliation with the Center for Fiduciary Excellence (CEFEX), described his firms's very first experience with it. "Using the 401kFiduciaryOptimizer to identify a local plan at potential risk, we secured a meeting with one of the company's partners. We presented a preliminary report based on the information gleaned from the company's most recent 5500 filing. This alone raised the partner's concern to the point of retaining our firm to complete a full analysis, providing us with all requested documentation before the end of that first meeting. Upon presenting our final presentation, we were retained as lead advisor for the plan. The RiXtrema platform provides a compelling call-to-action for unsuspecting plan sponsors, enabling us to help them reduce future liability. This was just the first of many cases for which we intend to rely on the RiXtrema solution."
You can visit RiXtrema in the Veo Village at the TD Ameritrade Institutional LINC conference in San Diego, Feb. 1-4, 2017, where they will be showing recent enhancements to the software.
Founded in 2010, RiXtrema is a portfolio crash-testing company that helps advisors discuss risk with clients. Long used by fund managers, pension 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 The Journal of Derivatives in April 2015. RiXtrema solutions include Portfolio Crash Testing; BioniX, the first robo platform for advisors that includes sophisticated risk modeling; IRAFiduciaryOptimizer, the first software to quantitatively compare and convert existing retirement portfolios into proposed new, compliant portfolios comprised of securities approved by the independent financial advisor or broker/dealer and the related 401kFiduciaryOptimizer DOL software solution geared for plan advisors. For more information, visit www.rixtrema.com.
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