September 8, 2011 – By Jessica Toonkel
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NEW YORK (Reuters) - Allianz Global Investors has reduced the fees on its target-date funds by as much as 33 percent to compete with its rivals.
Allianz has had higher fees than competitors like T. Rowe Price Associates and Fidelity Investments. The company hopes the lower fees will help it grab a bigger piece of the lucrative 401(k) plan pie.
Allianz's target-date funds are nearly three years old but have just $52 million in assets-a small sum compared with the $59.3 billion in assets under management that Allianz Global Investors had as of July 31.
Effective September 1, the New York-based subsidiary of German insurer Allianz <ALVG.E>, cut the expenses on its six target date funds by 14 to 35 basis points, depending on the class of shares.
Institutional shares of the Allianz Global Investors Solutions 2015, which are designed for large 401(k) plans, will now cost 57 basis points, down from 81 basis points. The average fee for a target-date fund is 86 basis points, according to Morningstar.
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Class A-shares of the fund, which are sold by retail brokers, will cost 97 basis points, down from 111 basis points. The other funds affected are its 2020 fund, 2030 fund, 2040 fund, 2050 fund and its Retirement Income fund.
Target-date funds, which invest funds more conservatively as they reach their stated retirement dates, are very popular options in 401(k) plans. Companies can enroll employees automatically and the funds are reallocated without any required decision-making by the employees.
A Towers Watson survey in June found that 57 percent of 401(k) plan sponsors automatically enroll employees into 401(k) plans. And 72 percent of those companies use target-date funds as the default option.
"It's hard to displace a fund if a plan has 50 percent of its assets with that fund," Dial said. "And if we say 'hey we have a similar fund, but your expenses are going to go up 30 percent, that's not going to fly."
As cost has become more important to 401(k) plan sponsors, Allianz sees lowering its fees as one way to boost its chance of wooing business away.
"Allianz wasn't even getting a second look from a lot of prospective clients," said Josh Charlson, an analyst at Morningstar Inc. "This will help them get a foot in the door."
Cost has driven more plan sponsor decisions on which target-date funds it selects both because of past complaints from participants about fees and because of transparency requirements kicking in early next year.
After the 2008 market meltdown, many 401(k) sponsors were hit with lawsuits from plan participants claiming their fees were too high, said Sue Walton, senior investment consultant with Towers Watson Investment Services.
A handful of the more than 20 lawsuits have resulted in settlements.
What's more, the Department of Labor has passed rules that in April will require plan providers to disclose their fees to 401(k) plan sponsors. The following month, companies will have to disclose plan fees to participants.
As a result, a number of fund companies have recently cut their fees. Last December, Putnam Investments reduced the fees on its target date fund, in some cases by more than 20 percent.
Allianz's new fee structure will make the funds more in line with the industry, Charlson said.
(Reporting by Jessica Toonkel; editing by Jennifer Merritt and Walden Siew)