Continued scrutiny of fees ranked as the most likely primary area of focus over the next year for DC plan sponsors, while participant communication and financial wellness were not far behind.
Retirement readiness was last year’s highest rated area, but that topic fell to the middle of the pack, according Callan’s 2019 Defined Contribution Trends Survey, now in its 12th year.
Conducted in the fall of 2018, the survey incorporates responses of 106 plan sponsors, including both Callan clients and other organizations, with 86% of them offering a 401(k) as their primary DC plan and 62% having more than $1 billion in assets.
According to the report, the percentage of sponsors calculating their DC plan fees in 2018 was down to 75%, from a high of 93% in 2013. Still, more than half of plan sponsors are likely or very likely to conduct a fee study in 2019. Moreover, one in five plans (20%) intend to conduct a recordkeeper search in 2019.
More than four out of five plan sponsors (83%) benchmarked the level of plan fees as part of their fee calculation process, up from 77% last year. In the majority of cases, the consultant/adviser conducted the benchmarking (82.4%), consistent with last year, Callan notes. More plan sponsors benchmarked their own plan fees in 2018 than in 2017 (22% versus 14%, respectively).
“With the amount of fee study and recordkeeper search project work we see, it is not surprising that fees are the No. 1 priority for plan sponsors in 2019,” notes Jamie McAllister, a Senior Vice President with Callan and co-author of the report. “What is surprising: Over 40% of plan sponsors said they don’t evaluate indirect revenue when calculating and benchmarking fees. As indirect revenue can be a meaningful amount, we feel it’s important for sponsors to consider this in their overall fee evaluation.”
Following a fee calculation review, more than half of plan sponsors kept fees the same (55%), while nearly 3 in 10 (29%) reduced fees. After reducing fees, the next most common activity resulting from a fee assessment in 2018 was changing the way fees were paid (14.7%). Callan notes that this proportion remains down significantly from 2016 – potentially reflecting the fact that many plan sponsors have already changed their fee payment model.
In addition to the overall focus on fees, the survey found that participants paid all investment management fees in more than three-quarters of plans and nearly always paid a share of them. But the survey also revealed a significant drop in the percentage of plans in which participants paid all administrative fees, from nearly 63% in 2017 to 33% in 2018.
As to improving the fiduciary position of their DC plan, consistent with prior years, the most important step plan sponsors took during 2018 was to review plan fees, ranking significantly higher than any other activity undertaken, according to the survey.
Implementing, updating or reviewing the investment policy statement (IPS) came in second, followed by conducting a plan audit, changing the investment menu, conducting formal fiduciary training and reviewing compliance.
Advisory Services and Wellness
As to participants’ financial wellbeing, Callan’s survey found a significant increase in the number of plans offering forms of investment help, with guidance jumping from 39% in 2016 to 89% in 2018. Onsite seminars was the next most common, increasing from 43% to 76% over the same period, followed closely by online advice, increasing from 54% to 74%.
Overall, the vast majority of DC plan sponsors (84%) offered some form of investment guidance or advisory service to participants. And in many cases, sponsors provided a combination of different advisory services, with two services provided on average, the report shows.
The percentage of plan sponsors that offering some type of financial wellness service increased to nearly 30% in 2018 from 17% in 2017. Among plans that do not currently offer these services, more than 17% plan to add them next year. Of those offering wellness services, basic financial education was the most widely offered (96%), followed by budgeting tools (80%) and financial planning (76%).
Other findings from this year’s survey included:
Investment menu: Roughly two-thirds of plans had a mix of active and passive funds. The vast majority of sponsors made no changes to the proportion of active versus passive funds, but those that did primarily increased the share of passive funds, which is expected to continue in 2019.
Consultant engagement: More than 8 out of 10 plan sponsors report they engage an investment consultant, similar to 2017. However, the share of sponsors using a 3(38) discretionary adviser – either exclusively or partially – increased from 10% in 2017 to 16% in 2018
Company match: The share of sponsors changing their company match policy jumped significantly, from 2% in 2017 to 22% in 2018. Additionally, more than a third anticipate making a change in 2019. A third of those that made a change increased the match. While 23% say they plan to increase the match in 2019, only 7% of plans report they are going to eliminate or reduce the company match.
Fund types and changes: Nearly two-thirds of sponsors made no changes to the number of funds in their plan in 2018, and three-quarters say they plan no changes in 2019. Of those that did make changes, the majority added new funds.
Target date funds: More than 70% of plans that offered TDFs used a partially indexed one. Use of indexed solutions for TDFs reportedly increased over the year, from 44% of plans in 2017 to 51% in 2018. Meanwhile, fewer plans offered their recordkeeper’s TDF option, declining from more than 50% in 2012 to 25% in 2018.
Asset retention: Nearly 60% of sponsors have a policy for retaining retiree/terminated participant assets, a sizable increase from 49% in 2016. Among sponsors that have a policy, nearly 70% sought to retain assets in 2018 versus 28% that did not.
Plan leakage: Slightly more than three-quarters of sponsors have acted to prevent plan leakage, and nearly half anticipate taking additional steps to do so – most notably, by encouraging rollovers and restructuring loan provisions.