Plan sponsors indicate they are more likely to conduct a fee study in 2021, compared to last year, according to the results of Callan’s annual Defined Contribution Survey.
Now in its 14th year, the survey finds that more than two-thirds of plan sponsors (71%) are either somewhat or very likely to conduct a fee study in 2021, a 15% increase from the prior year’s DC survey (56%). Most respondents also indicate that they are “very or somewhat likely” to review other fee types (e.g., managed account services fees) and indirect revenue (e.g., revenue shared from the managed account or rollover provider).
Conducted online in September and October 2020, and now covering the SECURE and CARES Acts, the survey incorporates responses from 93 large DC plan sponsors, including both Callan clients and other organizations. More than 90% of plans in the survey had over $100 million in assets, while 61% were “mega plans” with more than $1 billion in assets.
Governance and Process
Respondents overall rank plan governance and process as the top area of focus for DC plan committees by a substantial margin. Callan notes that this category was new to the survey this year and includes much of the basic “blocking and tackling” that plan sponsors do on an ongoing basis. Investment structure and fund/manager due diligence were tied for second.
The firm also broke out total plan fees into administration fee and investment fee categories in this year’s survey. More than half of respondents (53%) count investment fees as one of the top five areas of focus compared to 39% for administration fees.
Fewer plan sponsors report exploring a recordkeeper search in the coming year. Just 13.7% of respondents are somewhat or very likely to conduct a recordkeeper search in 2021, compared to nearly a quarter in last year’s survey.
A solid majority (59%) of respondents are likely to move to lower-cost investment vehicles (e.g., move from an R6 share class to a collective investment trust) in 2021, albeit a decrease from the prior year, Callan notes. Other “somewhat or very likely” actions include renegotiating investment manager and recordkeeper fees (47% and 37.5%, respectively).
Investment Trends
While mutual funds and collective investment trusts continue to be the most prevalent investment vehicles in plans, the survey found that CITs are increasingly finding their way into fund lineups. From 2019 to 2020, mutual fund offerings in plans rose by one percentage point from 84% to 85%, but CITs rose from 67% to 78%. Callan also reports that, over the past decade, the use of mutual funds has decreased by nearly 10% while the use of CITs has increased by about 25%.
Additional findings show that only 23% of respondents used their recordkeeper’s target date option in 2020, which the firm observes is a “sharp decrease” from 67% a decade ago. That number is projected to decrease slightly in 2021 to 21%, according to the findings.
The prevalence of mutual funds for a target date fund (TDF) is on the decline, as well. In 2010, 67% of plans used a mutual fund for their TDF compared to 42% in 2020, the firm notes. Moreover, 15% of respondents indicated they were changing the TDF/manager in either 2020 or 2021.
Callan further observes that the events of 2020, including the COVID-19 pandemic and economic turmoil, seem to have slowed the pace of change made to investment structures. Slightly more than 16% of plan sponsors report making changes to their investment structures in 2020, down from more than 25% in 2019.
The most common action in 2020 or planned for 2021 was to decrease the number of funds (25.5%). Only 9.8% of respondents indicated they would increase the number of funds in either year. And just 2 in 10 plan sponsors indicate that they are planning changes to their investment structure in 2021.
“The world is changing dramatically, and our annual survey is evolving to fit the shifting landscape,” said Jana Steele, survey author and a senior vice president in Callan's Defined Contribution Consulting group. “Some of the traditional activities we see in DC plans slowed this year or required greater urgency, likely due to the twin forces of the COVID-19 pandemic and the resulting financial shocks.”
Additional Highlights
Other findings from this year’s survey include:
SECURE Act: Uncertainty exists about adoption of the SECURE Act due in part to competing priorities and limited guidance, Callan notes. According to the findings, only 32% of plan sponsors with a qualified automatic contribution arrangement will increase their automatic escalation rate as a result of the SECURE Act. Additionally, 76% of DC plans signaled they are “very unlikely” to join a multiple employer plan (MEP) or pooled employer plan (PEP), with the top concerns being less control over plan administration (76%); complexity around administration (69%); and competitiveness relative to existing plan (67%). Additionally, the largest plans reported being concerned about cost efficiency compared to their current plan.
Financial Wellness: Seven in 10 employers offered financial wellness support, while only 14% offered a standalone financial wellness program. Only 26% of respondents do not offer any financial wellness tools, but more than a third of respondents (36%) without a financial wellness program are likely to offer a program in the future. The top reason for offering a financial wellness program was that it was part of the organizational philosophy to support employees (89%). The top-cited financial needs were retirement savings, emergency savings and debt management.
Health Savings Accounts: Employers with a DC plan only are the most likely to offer an HSA (58%), but only 22% of respondents use a solution that bundles DC and HSA services. In addition, 8 out of 10 plans are not considering a DC plan mirror for the HAS. Callan notes that this may be due in part to limited overlap in governance models between the two benefit types, as well as a reluctance to trigger ERISA by making active investment menu decisions.
