Asset management giant BlackRock has rolled out a set of mutualfunds for 401(k) plans that involve index, rather than activelymanaged, investments, including index versions of its LifePathtarget-date retirement funds. The move points to the growinginterest among retirement plan sponsors in using passively managedinvestments, which are usually less expensive than actively managedfunds.

BlackRock now offers 16 index mutual funds for 401(k) plans,including LifePath funds dated from 2020 to 2055, a bond fund thattracks Barclay's U.S. aggregate index and funds tracking differentstock indexes, such as the S&P 500, the Russell 2000 and theMSCI EAFE.

Chip Castille, managing director and head of BlackRock's U.S.and Canada defined-contribution group, says the index mutual fundsare aimed at small to midsize businesses and the financial adviserswho work with such companies. A large chunk of the $342 billion indefined-contribution plan assets that BlackRock manages are inindex investments, but those are mostly in collective trusts, whichtend to be used by bigger companies.

Castille notes that through its predecessor firm, BarclaysGlobal Investments, BlackRock was the first company to offer anykind of index fund and also the first to roll out target-datefunds, in 1993. “We've seen a higher level of interest fromadvisers and platform users regarding these strategies,” he says.“When you bring the most credible name in index fund management andcombine that with the original target-date fund for a new audience,you'll always get interest.”

Institutional share classes of the index LifePath target-datefunds will carry expense ratios of 24 to 31 basis points, vs.expense ratios of 85 basis points across the board for the activelymanaged version of those funds, Castille says. The amount of assetsrequired to qualify for institutional share classes variesdepending on the record keeping platform the plan sponsor uses, hesays. The index LifePath funds have the same glidepath as theactive funds.

Defined-contribution plans' use of index funds has grown“significantly” since the 1990s, says Winfield Evens, an investmentconsultant at Aon Hewitt. Winfield notes, though, that most plansoffer both index funds and actively managed funds, and plansponsors that offer only index funds are in the minority.

Plans are most likely to use index funds in the most efficientparts of the market, Evens says, where active managers are leastlikely to add value, such as large-cap U.S. stocks. Aon Hewitt'sannual survey of defined-contribution plans, which will be releasedsoon, shows that 95% of the 546 defined-contribution plans surveyedoffer S&P 500 funds, and 42% offer an indexed intermediate bondfund.

As plan sponsors increasingly focus on the cost of 401(k)investments, the lower price tag on passive investments is lookingbetter and better.

“Obviously index funds are going to have a lower coststructure,” Evens says. “A plan sponsor can never know what nextyear's return will be. You have a good sense of what next year'sfees will be. In any fund decision, cost is a key decisionpoint.”

Evens notes that calling target-date funds a passive investmentis a bit of a misnomer, since the decision on how to alter thefunds' asset allocation over time “is an active choice” on the partof the fund company. “We know from a lot of finance theory that themost important decision is the split between stocks and bonds,” hesays.

Stephen Butler, CEO of Pension Dynamics, which helps companiesdesign and administer their 401(k) plans, says using indexed fundseliminates the difficult task of picking active managers. “We allknow who's done well over the last three, 10, 12 years, but wedon't know prospectively who's going to continue to beat theircompetitors going forward,” Butler says. “The value of an indexfund is that you know that you'll beat 70% of the actively managedfunds” in that asset class, he adds.

For a look at how tiered investment strategies can makeselecting funds easier for 401(k) participants, see Cheersfor 401(k) Tiers.