Participant Investment Performance for Daily Valuation vs. Non-Daily V

[Guest Knud Gotterup]

I am looking for a study/article, etc. that analyses the invesment performance for plan participant in a daily valuation environment vs. a non-daily valuation inviroment.

It is my guess (at this point) that the cost of the daily valuation option + the effects of market timing on the part of plan participants results in lower rates of return but have nothing to back up my hunch.

Please help!

[Guest PWBAer]

Don't know of any formal studies, however my experience has shown that most individuals with the power to move their funds around at any time do not do so. Yet, those who may elect only 4 times (or less) per year to do so move their funds in down markets (locking in losses) for fear that the market will drop further and they will not be able to move their money again for 3 months.

[Guest derek]

I would check with the Profit Sharing Council, they may have a survey of this sort. Also, it is my impression from recordkeeping firms that the cost of daily valued plans is less than periodicly valued plans (or at least it is moving that way).

[MWeddell]

It seems like you're asking two related questions: does the higher cost of offering daily valuation decrease investment returns and does participants' usage of daily valuation (which might in net result in poor market timing) decrease investment returns.

Regarding the cost of offering daily valuation, certainly it does cost the provider more, in part because "daily valuation" has come to mean not just the recordkeeping system and linkages to the trustee and fund managers but also a lot of other services: automated phone system, telephone representatives, more outsourcing, communications, internet connections, etc. However, the charge for this higher level of service often is recovered in the investment management fees. Employers who switch from periodic / traditional valuation to daily valuation may perceive that their costs have fallen because (i) they are only looking at administrative costs or (ii) their traditional valuation arrangement was inefficient at getting service proportionate to all of the fees they were paying and getting the best investment results available. I don't think one can generalize about whether participants' investment returns will be better or worse with daily valuation: you'll have to look at what the investment vehicles were before daily for your particular plan and compare them to what would be available after a switch to daily.

Regarding whether participants' asset allocation behavior lowers their investment returns, I've not seen any conclusive studies on that. Certainly all of the 401(k) providers report that the vast majority of participants don't transfer assets very often and I recall (but couldn't find) some daily valuation providers who claimed in the early 1990s that allowing participants to transfer on a daily basis actually lowered the number of transfers compared to monthly valuation. Even for those participants who do transfer, I've not seen a good study that they systematically hurt their returns, although one reads a lot of anecdotal evidence.

Hope that helps you.

[LCARUSI]

You might want to contact SPARK (stands for something like Society of Professional Recordkeepers).

They might have survey information for you:

SPARK

(860) 683-0336

8 Griffen Road North

Windsor, CT 06095