Plan Sponsor Fee Focus Fuels Future Searches

A new report finds a material change in the proportion of plan sponsors initiating a recordkeeper search as a result of a fee study.

However, that report — Callan’s 10th annual “Defined Contribution Trends Survey” — noted that the material change in 2016 was not in the direction one might expect: in 2015, nearly 1 in 10 reported doing so; last year, that figure was 4.1%.

Study ‘Haul’?

However, more than 6 of 10 plan sponsors (60.8%) are either somewhat or very likely to conduct a fee study in 2017. This is up from last year (52.0%). Other somewhat or very likely actions include:

  • Renegotiating recordkeeper fees 49.5%)
  • Switching to lower-fee share classes (48.5%)

The report finds that recordkeeper search activity is likely to pick up in 2017, with 25.5% saying they are very or somewhat likely to conduct one in 2017 versus 20.0% in 2016. Likewise, 22.2% report that they will likely conduct a trustee/custodian search in 2017 versus 7.6% in 2016. As in prior years, few plan sponsors intend to shift who pays for plan expenses.

Fee Fie?

The number of plan sponsors that calculated their DC plan fees within the past 12 months dropped to 78.8% from 85.5% in 2015, well off the high of 92.9% in 2013. Fewer than two thirds (63%) of 401(k) plan sponsors had both calculated and benchmarked plan fees within the past 12 months.

Just under half of plan sponsors kept fees the same following their most recent fee review (49.0%), while about one-third of plans (31.6%) reduced fees (similar to 2015). After reducing fees, the second most common activity resulting from a fee assessment in 2016 was changing the way fees were paid. According to the report, nearly one quarter of plan sponsors changed the way plan fees were paid in 2016, up from 2015.

There has, however, been an increase in plan sponsors changing the way fees are communicated to participants (6.1% in 2016 versus 2.0% in 2015), which Callan notes may be a result of more plan sponsors changing the way fees are paid.

Most Important Steps

According to plan sponsor respondents, the most important step they took within the past 12 months to improve the fiduciary position of their DC plan was to review plan fees, well ahead of any other activity cited, according to the report. That said, updating or reviewing the investment policy statement came in second, with reviewing compliance, conducting formal fiduciary training, and changing the investment menu rounding out the top five (albeit distantly).

Looking ahead, here too plan fees were front and center for plan sponsors over the next 12 months. Compliance, participant communication and fund/manager due diligence were also high on the list.

Bundled ‘Up’?

The proportion of plans that are at least partially bundled came in at 53.8% this year — in line with 2015 (53.2%). Callan says that over time, the trend away from bundling is becoming clear. In 2010, 65.1% of plans reported that their plan was at least partially bundled.

Similar to last year, few mega plans (assets greater than $1 billion) have a fully bundled structure (4.1%), while almost half (48.6%) are fully unbundled. Approximately 10.8% of mega plans are fully unbundled but use the same vendor for multiple functions. For mid-sized plans ($50-$200 million in assets), 38.5% use a fully bundled structure, while the same perecentage use a partially bundled structure.

Success Measures

In measuring the success of the plan, participation rate/plan usage rated the highest, followed by contributions/savings rate and investment performance (tied for second place), with cost effectiveness and investment diversification tied for third place. Retirement income adequacy rose from near the bottom of the ratings in 2015 to about the middle of the pack this year (ahead of attributes like employee satisfaction, avoidance of fiduciary issues, the ability to attract/retain workers, and benchmarking against other plans).

More than 80% of plans in the survey have more than $100 million in assets, and nearly half (45.7%) are “mega plans” with greater than $1 billion in assets. The proportion of mega plans held constant from last year’s DC Trends Survey.

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