A new report suggests that the plan investment menu is of growing importance in motivating and determining provider changes by plan sponsors.
The report, published by Market Strategies, International, notes that an item moving up in importance is reevaluating the investment menu, for which 45% of plan sponsors said they plan to focus in the upcoming year, up from 38% a year ago, and a full quarter of plan sponsors intend to reevaluate their plan provider in the next 12 months, up from 18% in 2014.
Looking at plan size, the report notes that the proportion of micro plans intending to reevaluate their investment menu and their plan provider has surged from 33% in 2013 to 45% today. All told, nearly half (46%) of small plan sponsors intend to reevaluate their investment menus in the coming year (up from 37% in 2014), while 24% of mid-sized plans intend to reevaluate their plan provider in the next 12 months. In the report, micro plans are defined as those with $5 million to $20 million in plan assets, mid-sized range from $20 million to $100 million, large from $100 million to $500 million, and mega plans have more than $500 million in plan assets.
DC plan sponsors continue to refine their investment lineups, with half (50%) of all plans intending to make some sort of change to their investment offering in the coming year. One-third (35%) expect to change the mix of plan investments, averaging 16 to 20 options in total, while keeping the total number of investments the same. Those inclinations vary with plan size; 55% of small and 51% of mid-sized plan sponsors are likely to modify their investment lineups, compared with 31% of mega plan sponsors that intend to increase the total number of offerings. More than half (52%) of micro plan sponsors are not planning any change.
While that the investment menu climbs the criterion list, the report also notes that, as in prior years, the primary concern of plan sponsors is ensuring the plan complies with regulations, although this is now cited by just under half (49%) of all plan sponsors as one of their top three areas of focus, down from 57% in 2013, and just ahead of reducing plan costs (47%). In fact, one-in-five citing reducing plan costs as their top priority.
Both large and mega plans prioritize reducing plan costs, balancing this with the need to enhance participant education (large, 47%) and to adequately prepare participants for retirement (mega, 48%).
Disclosure Leverage
The report explains that while most (55%) of plan sponsors surveyed intend to maintain their current fee arrangements, they cited a growing minority of plan sponsors that are likely to take action. For example, more than 4 in 10 mid-sized and large plan sponsors say they intend to request fee reductions from their current providers, and one-third (34%) of large plans are likely to issue a formal RFP for recordkeeping services, up from just 21% a year ago.
As for those new fee disclosures, a third (33%) of all plan sponsors continue to use that information as a benchmarking tool, while one-quarter (25%) plan to leverage this new knowledge to negotiate for lower fees. However, among larger plans, the number intending to negotiate doubles; 48% of mega plans say they plan to do so, and more than half (51%) of large plans do. Additionally, nearly half (46%) of large plans and more than one-third (35%) of mega plans are also aiming to change some or all funds to lower-fee share classes.
Switch Criteria
Three-quarters (75%) of plan sponsors are at least somewhat likely to initiate a formal review of their current 401(k) plan over the next 12 months, and among this subgroup, 15% say that a switch in providers is highly likely. The potential for likely turnover increases to 26% among large plans and 21% among mega plans.
The criterion plan sponsors report to use most often in this evaluation process is:
- 55% — quality of investment options (55%)
- 48% — plan administration fees
- 48% — range of investment options
- 46% — overall service quality for participants
- 37% — plan design features
However, once again plan size matters; service quality for participants is the top criterion cited by large plan sponsors, and a very close second among small and mega plans, while micro plans are driving the increased attention to plan design features, and mid-sized plan sponsors express more interest this year in ease of fulfilling fiduciary responsibilities.
As for what would cause them to switch 401(k) plan providers, plan administration fees topped the list (for the second year in a row), cited by 41% of all plan sponsors (and the top criteria for plan sponsors in all size segments). Tied for second was quality of investment options and plan investment fees (33% each), while range of investment options was cited by 30% (up from 21% in 2014).
As for the other criteria, mega plans rate service quality for participants equally with plan administration fees, and in general, appear less fee-sensitive than their smaller-plan counterparts. Plan investment fees rank second as a reason for switching among micro, small and large plans, while mid-sized plans are more likely to switch due to the quality of the investment options.
The findings in the research paper was derived from two separate online surveys of 401(k) plan sponsors; the first conducted in February and March 2015 and the second conducted in March and April 2015 by Cogent Reports. For the first survey, respondents were required to have shared or sole responsibility for evaluating and/or selecting investment managers or investment options for their organization’s 401(k) plan. For the second survey, respondents were required to have shared or sole responsibility for plan design, administration or selection and evaluation of plan providers. You can download a copy here.
