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Fees, Participant Communication Remain Top DC Focus Areas for 2020

Industry Trends and Research

A new industry survey shows that defined contribution plan sponsors continue to make fees a top priority.

Now in its 13th year, Callan’s “2020 Defined Contribution Trends Survey” finds that, for the fourth year in a row, plan sponsors ranked reviewing plan fees as the most important step they took to improve their plan’s fiduciary position. Fees will also be the main priority in 2020, the survey shows. 

Conducted by Callan in September and October 2019, the survey incorporates responses of 114 plan sponsors, including Callan clients and other organizations. As in previous surveys, the majority of respondents (86%) offered a 401(k) plan as the primary DC plan; more than 90% of plans in the survey had over $100 million in assets and 65% had over $1 billion in assets.

Regarding fees, the DC survey also finds that:

  • two-thirds of plan sponsors are either somewhat or very likely to switch to lower-fee share classes in 2020;
  • about 4 out of 10 intend to switch to more institutional vehicles such as collective trusts or separate accounts;
  • nearly 9 out of 10 sponsors benchmarked plan fees as part of their fee review process, up from last year; and 
  • more than half of plan sponsors are likely to conduct a fee study in 2020.

“With the amount of fee-related project work we see, it’s not surprising fees continue to be a top priority for 2020,” notes Jamie McAllister, co-author and Callan DC consultant. “What is surprising: Over 45% of sponsors don’t evaluate indirect revenue as a part of their fee review. Since indirect revenue from sources such as managed accounts or rollover assets can be a meaningful amount, we feel it’s important to be considered in the overall fee evaluation.”

Investment Menus

As to investment menus, the survey found that the vast majority of DC plans had a mix of active and passive investment funds. In addition, more than three-quarters of sponsors did not change the proportion of active versus passive funds in their plan in 2019, and of those that did make changes, more increased the proportion of passive funds than active funds.

More than a third of plan sponsors reported replacing funds in the past year because of performance-related reasons. Callan observes that this was a large increase from the 25% that replaced a fund in 2018. And while most plans did not change the number of funds in 2019, more plans decreased rather than increased the number of funds.

And in what my come as no surprise, nearly every DC plan (93%) reported offering a target date fund. The prevalence of custom target date solutions saw a modest increase – from 13% to 17% – during the past year, while 21% of plans expect to use a custom approach in the coming year, the survey found. In addition, more than three-quarters have a TDF that is at least partially indexed.

Preventing Leakage

Callan further reports that the already high share of sponsors acting to prevent plan leakage rose from three-quarters in 2018 to nearly 9 in 10 in 2019. What’s more, nearly two-thirds anticipate taking additional steps in 2020 to prevent plan leakage – most notably by: 

  • making the fund lineup more attractive to retirees; 
  • restructuring loan provisions for the plan (e.g., by reducing the number of loans allowed); 
  • encouraging rollovers; or
  • supporting the retention of assets.

Communication and Advice

Participant communication also followed closely once again as a top area of focus for 2020. And for the third year in a row, financial wellness ranked as the No. 1 upcoming area of communication focus. But plan participation jumped significantly in importance, taking the No. 2 spot after being ranked No. 5 in last year’s survey. 

Meanwhile, communications focused on investing – such as market activity, use of funds, diversification and market timing – fell from second to fifth place. And while plan sponsors are heavily focused on managing plan fees, Callan observes that they are not as focused on communicating them, according to their lower ranking. 

In terms of media channels, email continued to be among the most used channels with all plan sponsors now using it. The recordkeeper’s website came in second, nudging postal mail into third for 2019. Additionally, mobile apps saw a sizable increase from last year, rising from 19% in 2018 to nearly 35% in 2019. 

Callan also found that the vast majority (95%) of DC plan sponsors offered some form of investment guidance or advisory service to participants, up noticeably compared to recent years. Online advice was the most commonly offered service.

Other survey highlights:

  • Plan success: For the fourth straight year, plan participation was the highest-rated metric for measuring the success of plans.
  • Company match: In 2019, 14% of plan sponsors made a change to their company match policy, down from last year’s figure. Additionally, nearly a third anticipate making a change in 2020.
  • Consultants: Nearly 9 in 10 plan sponsors said they engage an investment consultant, the highest level in survey history; more than one in five use a discretionary 3(38) consultant.
  • Auto features: Automatic enrollment apparently has reached saturation, according to Callan, remaining at around 7 in 10 plans for the past four years. Of those that do not automatically enroll employees, 5.6% report that they are very likely to implement this feature in 2020.
  • Roth: The percentage of plans offering a Roth account hit an all-time high of 87%, and the prevalence of Roths in DC plans has increased notably over the past several years, rising from 62% in 2015.
  • Cybersecurity: Despite being a newsworthy topic, the survey found that cybersecurity concerns increased only slightly in priority from the previous year. 

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