Latest Trends Survey Discloses Fees, Remain DC Plans’ Greatest Concern

The latest edition of a widely watched consulting firm survey of defined contribution (DC) retirement plan trends found that plan sponsors continue to focus intensely on fees, even though these expenses have been pressured lower in recent years by plans’ insistence and the threat of litigation.

Plan sponsors, by a wide margin, cited reviewing plan fees as the most important step they took in improving their fiduciary position in 2017, and 60% of survey respondents said they are somewhat or very likely to conduct a fee survey in 2018, according to the 11th annual “Defined Contribution (DC) Trends Survey” by independent investment consulting firm Callan. The 2017 survey was conducted in the fall of that year.

Fee Focus Undiminished

In the latest year, 83% of the plans surveyed said they calculated fees within the past year and 41% reported reducing fees as the result of a review. Further, 52% said they were somewhat or very likely to switch to lower-fee share classes for their investment menus.

Beyond fee concerns, the survey also found that the use of automated features continued to be widespread. Nearly three-quarters of nongovernment plans used auto-enrollment in 2017; four out of five plans with auto-enrollment also offered automatic contribution escalation; and plan sponsors reported the highest average auto-enrollment default contribution rate in the survey’s history (4.6%).

This year’s survey comprises responses from 152 U.S. DC plan sponsors, including both Callan clients and other institutions, with more than 90% of plans in the survey having greater than $100 million in assets. “Mega-plans” with more than $1 billion in assets made up 60.5% of the respondents, a 32.4% increase in this category from 2016.

Key Findings

Other key findings from the survey:

• Consultants: four out of five plan sponsors said they engage an investment consultant, but a third were unsure whether their consultant has discretion over the plan.
• Success: The three most important factors cited by plan sponsors in measuring plan success were participation, investment performance, and contribution rates.
• Revenue sharing: Plan sponsors reported a decrease in the use of revenue sharing to pay fees, with the most common fee payment approach reported as explicit per participant fees (54.7%). It’s common for financial institutions that provide plan recordkeeping and other services to DC plans to receive payments from some of the investment options they offer participants. These payments, called “Rule 12b-1 fees,” shareholder or administrative service fees, are seen as part of the plan sponsor client’s fee payment to the recordkeeper.
• Communication: Plan sponsors most commonly reported that their area of communication focus in 2018 will be financial wellness.
• Recordkeepers: Almost half of plan sponsors said their recordkeeper would provide advice under the Department of Labor’s (DOL) Fiduciary Rule; however, that same amount did not know what they will require their recordkeeper to provide in 2018 to monitor advice given. Also, one in six plan sponsors intends to conduct a recordkeeper search in 2018.
• TDFs: More than half of plan sponsors took action related to their target date funds (TDFs) in 2017; 52% of those taking action said they evaluated their target-date glide paths’ suitability for their plan. Ninety-one percent of those surveyed offer a TDF to their participants.
• Roth features: 71% in the survey now offer an after-tax Roth option in their plans.
• Fund changes: U.S. small-/midcap equity funds were the top type of fund to be added in 2017, and among the most likely to be eliminated in 2018.
• Cybersecurity: This concern rose from a place near the bottom of the pack last year to a middle rating in 2017.
• Plan leakage: The percentage of plans with a policy for retaining retiree/terminated assets climbed to 61%, with half pursuing a policy of seeking to hold on to these assets.

When it comes to monitoring advice given to their participants by service providers under the 2017 DOL Fiduciary Rule, it appears there is no clear majority practice. At the time the survey was conducted, the most prevalent monitoring requirements were reviewing the advice software (46.1%), receiving reports on advice interactions (40.2%), and reviewing samples of written communications (40.2%).

Going forward, monitoring practices by plan sponsors for providers of participant advice seem even murkier: 42.7% of respondents did not know what they will require in 2018, and an additional 12.2% expects to have no monitoring in place yet.

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.