A Conversation with American Funds

American Funds is the largest provider of R shares in the industry, with more than $164 billion in assets. Although the firm grants very few interviews with the press, the firm’s retirement team answered several retirement-focused questions provided by FRC:
FRC: A growing number of B/Ds, asset managers and plan providers are beefing up their services (websites, value-added materials, etc.) for small and mid-sized retirement plans. Does American Funds have any new support services specifically for this small/mid retirement plan market segment? American Funds: While we don’t have any specific new support services, we are constantly seeking to upgrade and improve our Web site. It’s important to remember that when we launched our retirement Web site, we understood that the majority of advisors using American Funds operated in the small/mid-size market, and that influenced how we thought about the site.
FRC: Why are small and mid-sized plans the target of so much attention these days? American Funds: We cannot speak for other investment management firms, but at American Funds we have always focused on the small/mid-size market. As you know, American Funds can only be purchased through a financial advisor. So we’ve always focused a great deal of attention on individual advisors who, in turn, focused on small and mid-sized business. Our initial focus on small/mid-sized plans was a natural outgrowth of our focus on advisors.
FRC: In 2002, American Funds was just starting to look at R shares as a way to incentivize financial advisors for selling retirement plans. Now your firm is the largest R share provider in the business. How did that happen? American Funds: The idea that American Funds introduced R shares as a way to incentivize/reward financial advisors for selling retirement plans is incorrect. As the Defined Contribution market grew, it became increasingly clear that a one-size-fits-all approach to retirement plans wouldn’t work. We introduced R shares to give advisors and Plan Sponsors more flexibility. With several different retirement share classes, the advisor and Plan Sponsor can choose the most appropriate share class given the size of the plan and complexity of servicing the plan. Giving the advisor and Plan Sponsor the ability to choose the most appropriate share class has helped, but the most important element of our success has been the long-term [performance] record of our funds.
FRC: R shares add another layer of complication to a product that is already complicated enough. But American Funds has been very successful offering several different versions of R shares. Why is that? American Funds: When we introduced R shares, our goal was to give the advisor and Plan Sponsor the flexibility they needed to choose the share class that best fit their needs. While some may believe that having more choices complicates the process, we believe it makes the process more transparent and actually helps advisors and Plan Sponsors choose the most appropriate share class.
FRC: Tracking the source of a retirement sale, and then rewarding the DCIO wholesaler or financial advisor located in that wholesaler’s territory, has always been a complicated issue. As a result, many firms simply pay commissions and bonuses to both the wholesaler and the FA. Has the industry made any progress developing a system to track sales and attribute flows to either the wholesaler or the FA? American Funds: You’re correct. This continues to be a challenge for the industry. We continue to study the issue, but at this point are not in a position to propose a solution.