For the third year in a row, respondents to the annual Callan Institute “Defined Contribution (DC) Trends Survey” specified reviewing their plan fees as a key area of focus and as the best way to improve their fiduciary position as plan sponsors.
Asked in the fall of 2018, 106 defined contribution (DC) plan sponsors, both Callan clients and other organizations, said that for 2019, assessing fees was more important than any other activity they undertook in managing their plans.
Plan fees’ top rank for sponsor focus over the next 12 months replaced last year’s highest-rated area, retirement readiness, which fell to the middle of the pack for 2019.
Participant communication and financial wellness (a new category this year) were the next two highest-rated areas of focus for 2019. Prioritizing financial wellness and communications may likely go hand-in-hand in 2019, the Callan survey said. Despite being a newsworthy topic, cybersecurity was reported as a low priority in this year’s survey.
Looking back over the previous year, survey respondents also rated reviewing plan fees as the top action taken within the past 12 months to improve the plan’s fiduciary positioning. Implementing, updating, or reviewing their investment policy statement (IPS) came in second. Conducting a plan audit ranked third, followed by changing the investment menu, conducting formal fiduciary training, and reviewing compliance.
Drilling Down on Fees
Among the plan sponsors surveyed in Callan’s 12th annual review, 77.1% said they had figured and assessed their DC plan fees in the last year, and 57.5% said they looked at indirect revenue when calculating fees.
More than 80% used benchmarking as part of their fee calculation exercise, up from about 77% last year. Most (82.4%) said their plan consultant or adviser conducted the benchmarking, roughly the same proportion as the year before. About 22% also said they benchmarked their own fees in 2018, compared with only 14% in 2017.
Five in 10 plan sponsors are either somewhat or very likely to conduct a fee study in 2019 (52.5%), down from last year’s survey (60%). Other somewhat or very likely actions reported include switching to lower-fee share classes (56.1%) and switching to more institutional vehicles such as collective trusts or separate accounts (42.1%).
Renegotiating recordkeeper and investment manager fees will also be on plan sponsors’ to-do lists, the survey indicated, at 33.8% and 26.7%, respectively.
On the sometimes-controversial topic of revenue sharing, the survey found 19% of respondents used explicit asset-based fees in the latest year, versus 64% that reported using explicit per-participant fees for their plans. The margin between these two methods has widened since 2017.
No plans with revenue sharing reported that all of the funds in their plan included it, a decrease from the prior year. The most common was to have between 10% and 25% of funds paying revenue sharing, consistent with 2017. Still, about 6% of respondents said they are not sure what percentage of the funds in the plan offer revenue sharing.
Other significant trends highlighted in the 2019 Callan survey include:
- Eighty-six% of plans in the survey offer a 401(k) plan, and 62.2% were “mega plans” with more than $1 billion in assets in their DC plans.
- Fully bundled plans, which use the same recordkeeper and trustee, with all investment funds managed by the recordkeeper, declined to 12.3%, the lowest in the survey’s 12-year history. This reflects a larger unbundling trend over time, Callan said.
- Four out of five plan sponsors surveyed say they engage an investment consultant.
- Eighty-three% said they took steps to ensure Employee Retirement Income Security Act (ERISA) Section 404(c) compliance in 2018, and more than half personally reviewed that compliance.
- A 3(38) discretionary adviser was retained by 16% of the plans.
- Twenty-two% of surveyed plans said they made a change to their company match policy in 2018, and 33% of these increased the match.
- Those plans providing a retirement income projection fell modestly to 73.1% from the last two years’ level, following a dramatic increase in this offering from 2015 (56.1%).
- Fifty-eight% of the Callan survey respondents said they have a policy on asset retention.
- A Roth feature is now offered by 85% of the plans.
Respondents to the 2019 Callan survey spanned a wide range of industries, with the largest proportion (21.7%) in financial services, followed in turn by technology, professional services, energy/utilities, and health care.