Advisers Can Help Plan Sponsors With Their Focus on Fees

Retirement plan fees ranked as the most likely primary area of focus over the next 12 months among the 106 plan sponsors that participated in Callan’s 2019 Defined Contribution (DC) Trends Survey, with one-third ranking it as a “4” on a 5-point scale and one-quarter ranking it as a “5.”

Almost half of the plan sponsors surveyed had a written fee payment policy in place, either as part of their investment policy statement (19%) or as a separate document (27%).

The percentage of plan sponsors that calculated their DC plan fees within the past 12 months was 77.1%, and 57.6% said they evaluated indirect revenue when calculating fees.

Over four in five plan sponsors (83.3%) benchmarked the level of plan fees as part of their fee calculation process, up from last year (77.2%). In the majority of cases, their plan consultant/adviser conducted the benchmarking (82.4%), which was consistent with last year. More plan sponsors benchmarked their own plan fees in 2018 than in 2017 (22.1% vs. 14.1%, respectively).

The survey found plan sponsors tend to use multiple data sources in benchmarking. Consultant databases (67.7%) were the most heavily used method, showing a substantial increase year-over-year. Requests for information (RFIs) (25.8%) and data from the plan recordkeeper’s database (24.2%) were the next most frequently cited. General benchmarking data fell in half from last year (46% in 2017 vs. 22.6% in 2018). Two-thirds (66.3%) both calculated and benchmarked plan fees within the past 12 months.

Over half of plan sponsors kept fees the same following their most recent fee review (54.7%), while about three in ten plans (29.3%) reduced fees. After reducing fees, the next most common activity resulting from a fee assessment in 2018 was changing the way fees were paid (14.7%).

According to the survey results, investment management fees were most often entirely paid by participants (77.1%), and almost always at least partially paid by participants (91.6%). In contrast, about one-third (32.5%) of all administrative fees were paid entirely by participants, down significantly from 62.7% in 2017. This was offset by an increase in fees being entirely paid by the plan sponsor (17.8% in 2017 vs. 27.7% in 2018) and fees being split between the sponsor and participant (19.5% in 2017 vs. 38.6% in 2018).

Most plan sponsors (71.1%) noted that at least some administrative fees were participant-paid. In a modest increase from last year, 29.3% of participants paid administrative fees either solely through revenue sharing or through a combination of revenue sharing and some type of out-of-pocket fees. Only 13.8% paid solely through revenue sharing (vs. 14.7% in 2017). Of those paying through an explicit fee, using a per-participant fee continued to be more popular than an asset-based fee, and by a much wider margin in 2018.

Revenue sharing

No plans with revenue sharing reported that all of the funds in the plan provided revenue sharing, a decrease from 2017. The most common was to have between 10% and 25% of funds paying revenue sharing, consistent with 2017. Still, about 6% said they are not sure what percentage of the funds in the plan offer revenue sharing.

Eight out of 10 plan sponsors with revenue sharing had an Employee Retirement Income Security Act (ERISA) account. This was up significantly from 2017 (54.2%) and even more so since 2011 when just over one-third reported having one. For the first time, no plan sponsors responded that they did not know if they had an ERISA account.

In most cases (61.5%), reimbursed administrative fees were held as a plan asset. Consulting fees were the most commonly paid expense through the ERISA account (57.1%), taking over the number one spot from communications, which came in fifth place. Rebating excess revenue sharing, auditing fees, and legal fees tied for second place.

2019 Actions

Five in 10 plan sponsors reported they are either somewhat or very likely to conduct a fee study in 2019

(52.5%), somewhat down from last year (60%). Other somewhat or very likely actions 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 (33.8% and 26.7%, respectively). Survey results suggest recordkeeper search activity is likely to continue in 2019, with 19% saying they are very or somewhat likely to conduct a search, up from last year.

And in 2019, more plan sponsors intend to shift fees from the participant to the plan sponsor rather than from the sponsor to the participant.