Defined contribution plan fees continue to drop as retirement plan sponsors have become increasingly aware of what is expected of them.
The 11th annual “NEPC Defined Contribution Plan and Fee Survey” found that 81% of plans have renegotiated their fees since 2013.
“I think fees have been a front-burner issue for plan sponsors as a result of the litigation and the focus on fees, also due to regulation,” says Ross Bremen, partner and defined contribution strategist for NEPC, Inc.
“We’ve seen a decline in fees overall as plan sponsors are doing the work to evaluate whether their fees are competitive,” he says. “Now they are looking at whether they have the right fee model and whether they have the cheapest share class they qualify for.”
In the past decade, there have been numerous class action lawsuits focusing on plan fees and there have been some sizable settlements. There’s also been increased regulation in the form of the Department of Labor’s fee disclosure rules, requiring both plan providers and plan sponsors to provide more accurate accountings of their fees, and the final fiduciary rule, which governs who is and isn’t a fiduciary when it comes to a retirement plan.
Although lower fees are a good thing for plan participants, “a race to the bottom shouldn’t be the ultimate goal,” Bremen says. “We often hear that you get what you pay for and recordkeeping is no different in that regard.”
He added that there is not an absolute bottom at this point but “we know it is a balance. Recordkeeping is a back-office technology that requires constant reinvestment and constant investment, and innovation is not free.”
Plan providers need to be able to make some money for their efforts and the services they provide but dropping fees as low as possible does not foster innovation or aid service levels, Bremen adds.
Record keepers are automating plan designs as much as possible and pushing participants to web-based and app-based solutions.
“In theory, there may be improvements that allow record keepers to operate more efficiently, so the ultimate fee bottom is a moving target. There is no magic number today, but I think if there continues to be an overfocus on fees, an overreaction to what is happening in the marketplace, that is one in which we could potentially see a bad outcome,” he says.
Respondents to NEPC’s survey were equally concerned about measuring and benchmarking their current fees, ensuring that their current recordkeeping pricing model was appropriate and ensuring that current fees were at the lowest level their plan qualifies for.
NEPC surveyed 117 defined contribution plans with $127 billion in aggregate assets and 1.4 million participants. The plans were provided by 19 record keepers.
Overall, the survey found that recordkeeping costs declined from $64 per participant in last year’s survey to $57 per participant in this year’s survey.
“We continue to see the way plans contract is changing,” he says. “A majority of plans now contract on a fixed dollar basis as opposed to an asset-based fee.” Last year, only 47% of plans contracted on a fixed dollar basis.
Plan sponsors also are reassessing the role of revenue sharing in their plans.
“I’m not suggesting that revenue sharing has completely gone away — 79% of plans still have some element of it — but 21% of plans have no revenue sharing,” Bremen says. And, he adds, those aren’t just larger plans, but small and mid-size plans that are eliminating the revenue sharing in their plans.
It used to be that large plans with the most assets and largest number of participants were the only ones looking at fixed dollar approaches because they were under the most scrutiny, he explains. That was certainly reflected in the class action lawsuits. But now it isn’t just the large plans that are under scrutiny. Plan sponsors of all sizes are now being fair with regard to fees and transparency and that has led to more of them choosing a fixed fee model rather than a revenue sharing model.
“Record keepers, they recognize that if they want to continue to be competitive and … attract new clients, they have to offer what the marketplace is looking for, regardless of plan size,” Bremen says.
NEPC also found that 94% of plans are offering target-date funds and 88% of those are using TDFs as their qualified default investment alternative; 34% of plans are using passive TDFs, while 10% are using custom TDFs.
Index funds are also on the rise, with 43% of plans including the makings of a passive tier in their investment menus to complement their active options, NEPC found. Ten percent of plans added an index fund to their lineup in 2015, according to the report.
There has been a move to passive investments in recent years because of studies showing them outperforming actively managed investments but, as Bremen notes, “if you wait long enough, there’s a back to the future phenomenon, regardless of topic, so if we have the same conversation in a year from now or three years from now, we might be seeing an underperformance of passive managers and a focus by sponsors on actively managed new opportunities out there.”
Bremen said he was surprised that fees continued to go down this year.
“We’ve seen fees declining for many years and so we speculated that a lot of the low-hanging fruit had been harvested, and we did see fewer plans moving to cheaper share classes this year relative to last year, as an example,” he says. “But plan sponsors are continuing to take advantage of every opportunity that presents itself.”
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