Following a decade of litigation, defined contribution (DC) plan sponsors continue to rank governance and process—a broad category that includes much of the “basic blocking and tackling” that plan sponsors do on an ongoing basis—as one of the top areas of focus, a newly released survey reveals.
Consistent with prior years, DC plan sponsors were largely focused on their investment policy statement (IPS), reviewing plan fees, and the investment structure in 2023. These will also be top areas of focus in 2024, with reviewing plan fees as the highest (74%), according to Callan’s 2024 DC Trends Survey.
Now in its 17th year, the findings were unveiled during an April 23 webinar led by Jamie McAllister and Jana Steele of Callan’s DC Research and Consulting Group. Conducted online in late 2023, the survey incorporates responses from 132 DC plan sponsors among both Callan clients and other organizations. While respondents spanned a range of industries, nearly 90% of plans in the survey had over $200 million in assets, and 58% had more than 10,000 participants. More than two-thirds of respondents were corporate organizations, followed by public (16%) and tax-exempt (15%) entities.
Focus on Fees
Among other things, McAllister and Steele explained that investment management fees have also ranked as a top area of focus year over year, while plan administration fees have consistently been ranked slightly lower.
“Investment management fees are generally more straightforward to benchmark and monitor, allowing for more frequent review. Plan sponsors should be mindful to review all plan fees on a regular basis,” the pair noted.
Consequently, fewer than half of plan sponsors kept fees the same following their most recent fee review, while nearly half reduced fees, the survey found. In addition, two-thirds of plan sponsors are either “somewhat or very likely” to conduct a fee study in 2024. Most respondents also indicated they are very or somewhat likely to review other fee types (e.g., managed account services fees) and indirect revenue.
Half of respondents also indicated that they are likely to move to lower-cost investment vehicles (e.g., move from an R6 share class to a collective investment trust) in 2024, which they found was a notable increase from last year’s survey (42%).
Additionally, only 16% of sponsors plan to explore a recordkeeper search in 2024, which is down from the last two years’ results (24% in 2022). Other somewhat or very likely actions include renegotiating investment manager fees (43%), renegotiating recordkeeper fees (42%), and rebating revenue sharing to participant accounts (39%).
Investments
Meanwhile, only 18% of plan sponsors reported making changes to the number of funds in 2023. Roughly the same percentage indicated they are planning a change in 2024. Of those that made changes in 2023, there was an even split between those increasing the number of funds and those decreasing the number, McAllister and Steele noted.
Additional findings show that in 2023, nearly all plan respondents (94%) offered a target date suite and 90% used a target date fund (TDF) as their default for non-participant-directed monies.
Among those that offer TDFs, nearly 8 in 10 used an implementation that was at least partially indexed. The share of active-only strategies rose to 21% in 2023 from 15% in 2022, which was its lowest point in the survey’s history, observed McAllister.
While all respondents indicated they benchmark their TDFs, roughly 80% reported using multiple benchmarks, indicating that plan sponsors are seeking a more nuanced evaluation. In addition, over 7 in 10 plans took at least one action around the target date fund suite in 2023, the most common of which was to evaluate the suitability of the underlying funds and the glidepath.
The prevalence of mutual funds for the TDF continued its decline, the Callan consultants further observed. In 2010, 67% of plans used a mutual fund for their target date fund compared to 42% in 2020. This decreased further in 2023 to 28%, they noted.
The survey also found a meaningful uptick in the prevalence of offering managed account services, rising from 52% in 2017 to 58% in 2023. Additionally, over 70% of plan sponsors monitored their managed account services by reviewing participant usage and interaction, while just over 60% reviewed fees and services.
Additional Findings
Additional findings the Callan consultants singled out included the following:
- Most plans offered some sort of retirement income solution to employees in 2023, with installment payments (78%) and partial distributions (76%) being the most common; providing access to a drawdown solution, managed accounts, or a defined benefit plan were the next most common.
- Financial wellness tools (70%) saw a significant increase in utilization in 2023 compared to 2017.
- 81% of sponsors sought to retain assets of retirees, and 61% sought to retain assets of terminated participants.
- Most plan sponsors reported taking steps to prevent plan leakage; actions included offering partial distributions (74%), installment payments (72%), and encouraging rollovers in from other qualified plans (64%).
- Slightly fewer than half of survey respondents allowed terminated participants to continue repaying their DC plan loans.
“This year's survey shows how certain trends that have only emerged within the last few years are persisting—trends such as retaining assets in the plan, increased valuations of indirect fees, collective trusts prevalence over mutual funds, and more,” McAllister further observed in releasing the findings.
A summary blog post, along with the survey results, can be found here.
