Large plan sponsors continue to be laser-focused on fees, but they also will be taking a close look at their investment policy statements and conducting formal fiduciary training in the coming year.
These are among the findings in Callan’s 2022 Defined Contribution Trends Survey. Now in its 15th year, the survey reviews key findings from 2021 and expectations for 2022 for DC plan sponsors.
Reviewing fees was the most important step taken to improve their plan’s fiduciary position in 2021, according to 76% of respondents. This was followed by examining the plan’s investment policy statement (63%) and investment structure (61%), and completing formal fiduciary training (52%). These will all be primary focus areas in 2022, according to the survey. Reviewing security protocols was also a priority, with 41% of plan sponsors taking action in 2021; about a third said they will do the same in 2022.
The survey was conducted in the fall of 2021 and incorporates responses from 101 DC plan sponsors. Most (90%) offered a 401(k) plan as the primary DC plan and more than 97% of plans had more than $100 million in assets; 74% were “mega plans” with over $1 billion in assets. In addition, more than three quarters were corporate organizations, followed by governmental (11%) and tax-exempt (7%) entities.
Fee Reviews
Regarding the 2021 fee reviews, Callan found that 83% benchmarked plan fees, with consultant databases as the most commonly used method. In addition, 33% of respondents reduced fees after their most recent fee analysis. Nearly 7 in 10 respondents calculated all-in fees, such as administration, participant transaction, compliance, custody and communications fees, within the past 12 months.
Investment management fees were most often paid entirely by participants (85%) and almost always at least partially by participants (92%). In contrast, 58% of all administrative fees were paid entirely by participants.
For 2022, 72% of plan sponsor respondents said they are “somewhat or very likely” to conduct a fee study, and nearly the same share said they are “somewhat or very likely” to review other fee types. What’s more, 58% of respondents indicated they are likely to move to lower-cost investment vehicles. Other somewhat or very likely actions include renegotiating:
- investment manager fees (41%);
- service agreements with recordkeepers (39%); and
- recordkeeper fees (39%).
Meanwhile, fewer plans (17%) did not evaluate indirect revenue and a larger proportion (43%) did not know whether their all-in fee calculation involved an evaluation of indirect revenue.
“With the continued focus on fees, plan sponsors have more access to detailed fee data, allowing them to take a deeper dive when reviewing fees,” said Jamie McAllister, co-author of the resulting study and Callan DC consultant. “While there is a greater level of fee data and transparency, it is still surprising that 43% of sponsors don’t know if indirect revenue is evaluated as a part of their fee review. This can be a meaningful amount,” McAllister observes.
Additional Findings
Callan’s survey also found that recent legislative initiatives spurred sponsors to make several changes to their plans. For instance, the SECURE Act prompted 31% of respondents to say they will increase their automatic escalation rate and 13% to say they are “very or somewhat likely” to add an annuity option. And after the CARES Act established Coronavirus-related distributions for qualified individuals, 35% of sponsors say they are now actively encouraging affected participants to make repayments.
Other findings include:
- Target Date Funds: Other key findings from the survey show that nearly all plans offered a TDF. Among those that did, 81% used an implementation that was at least partially indexed. Moreover, the share of active-only strategies is now at its lowest point in survey history (19%), Callan notes. Nearly two-thirds (63%) of plans took at least one action around their TDF in 2021, with evaluating the suitability of the glidepath (41%) and the suitability of the underlying funds (29%) as the most common. A similar percentage of plans intend to evaluate the suitability of the glidepath in 2022. Most respondents (92%) also used a TDF as the default, which is an all-time high, the study notes.
- Investment Structure: In a drop-off from past years, Callan found that only 38% of plan sponsors conducted an investment structure evaluation within the past year, though 79% have done so within the past three years.
- ESG Fund: Most plans (9 in 10) do not offer an ESG fund, but about a third indicated they will consider it in the future. Callan notes that this was a newly added question to the survey.
- Recordkeepers: Nearly a quarter (24%) of sponsors plan to explore a recordkeeper search in the coming year, which, the study notes, was a sizeable increase from the firm’s previous survey (14%).
- Financial Wellness: 86% of employers offered financial wellness support. Of those employers that did not offer any financial wellness programs, 22% indicated they may do so in the near future.
- Leakage: 86% of sponsors took steps to prevent plan leakage. According to the findings, the top actions included offering partial distributions (66%) and installment payments (57%).
- Retaining Assets: Slightly more than half of plans (51%) had a policy regarding the retention of terminated or retired participant assets; of those that did, 76% sought to retain the assets of both retirees and terminated participants, a significant increase from 2015 (44%).
- Retirement Income: 85% of plans offered some sort of retirement income solution to employees in 2021. Partial distributions (82%) and installment payments (77%) were the most common solutions, according to the findings.
