Benefits and Compensation

Study: Retirement Plan Fees’ Decline Slowed in 2017

Retirement plan recordkeeping, trust, and custody fees—in a steep decline for years under pressure from sponsors, participants, federal regulations, and litigation—remained flat for the first time since 2010, according to a new survey.

NEPC LLC, a consulting firm whose surveys are intended as a tool to help plan sponsors benchmark their plan fees, analyzed data from 123 defined contribution (DC) plan respondents with $138 billion in aggregate assets, representing 1.5 million participants. Each plan among NEPC’s respondents for 2017 had more than 12,000 participants, and the average plan size was $1.1 billion, the firm said.

The 12th Annual NEPC Defined Contribution Plan and Fee Survey  showed that DC plans’ expenses stayed steady in 2017 at a median annual $59 per participant, up slightly from $57 in 2016. This year’s asset-weighted average expense ratio for DC plans was 0.41%, or 41 cents per $100 in fund assets, in line with the ratio reported by NEPC in 2016 of 0.42%.

Drop in Median Fees

In contrast, when NEPC first conducted the fees study in 2006, median fees per participant were $118 and the expense ratio was 0.57%.

“After [a consistent decrease] for the past 7 years, it’s surprising to see fees flatten out even though we had been anticipating it,” Ross Bremen, partner and defined contribution strategist at NEPC, said in a late August press release about the 2017 survey.

“Plan fees were the lowest in a decade last year, and now the trend has taken a breather. Low fees have been a source of mixed emotions. While sponsors are able to highlight their good work by reducing fees for participants, it’s done at the risk of hindering innovation and service. However, we believe there’s a good chance fees will lower again next year,” Bremen said.

He said he based this forecast on several factors, including sponsors that have been considering share class and contracting changes but have not yet made them. He also said a “significant number” of vendor searches now in progress at plans have not yet been captured.

Responses on Plan Design

In addition to plan fees, respondents to the 2017 NEPC survey were asked about plan design. Results show that the median plan offers 23 investment options, compared with 22 options in 2016 and 14 in 2006.

Among those investment options, NEPC said, target date funds (TDFs) continue to be the most popular, with 94% of plans in the survey offering them. Of those plans, 90% use TDFs as their qualified default investment alternative (QDIA), and assets in their TDFs are at a record high of 34%.

The findings also showed that 33% of plans include passive TDFs and 54% have components of a passive tier to complement active options for participants.

Revenue-Sharing Trends

The survey also provided some insight about the plans’ revenue-sharing activities. The arrangements have generated some controversy in the retirement plan industry arising from their appropriateness for participants with different-sized accounts and for a perceived lack of transparency. Here are some of the key data points:

  • 77% of plans use some form of revenue sharing but are looking for ways to give excess revenue back to participants. (Revenue-sharing payments are amounts paid to a recordkeeper for hosting an investment fund on the recordkeeper’s 401(k) platform. These payments can include 12b-1 fees, shareholder service fees, and sub-transfer agency fees. These fees are generally built into the fund’s expense ratio, which is the cost charged to investors for management of the fund.) Smaller funds in particular are beginning to eliminate revenue sharing altogether.
  • 70% of plans in the NEPC survey use revenue sharing to cover fees. However, almost one-third (29%) use a flat dollar charge to pay fees instead.
  • Just 5% of plans have excess revenue retained by the recordkeeper. Three-quarters (73%) use it to offset fees, and a third (33%) return it to participants.
  • 60% of non-bundled plans use revenue sharing to offset fees, 24% return revenue-sharing dollars to participants, and an additional 30% have no revenue sharing.
Jane Meacham is the editor of BLR’s retirement plan compliance publications. She has nearly 30 years’ experience as a writer/editor of financial services news.