Data & Research January 22, 2018

More DC Plan Sponsors Lowered Fees After Reviews in 2017

In the majority of cases, the plan’s consultant/adviser conducts the benchmarking (82.8%)—higher than in prior years, Callan finds.

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Following their most recent fee review about four in ten defined contribution plan sponsors (40.5%) reduced fees, according to the 2018 Callan Defined Contribution Trends Survey. Callan says this is a notable increase from prior years (31.6% did so in the prior year’s survey).

The number of plan sponsors that calculated their DC plan fees within the past 12 months rose to 83.1% in 2017 from 78.8% in 2016. Only 5% have not calculated plan fees within the past three years (or are unsure).

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More than three-quarters of plan sponsors (77.2%) benchmarked the level of plan fees as part of their fee calculation process, down slightly from last year (79.2%). The percentage of plan sponsors that do not know whether plan fee levels are benchmarked (9.6%) is up from 7.5% in 2016.

In the majority of cases, the plan’s consultant/adviser conducts the benchmarking (82.8%). This is higher than in prior years. Conversely, fewer plan sponsors are benchmarking their own plan fees than in prior years. Plan sponsors tend to use multiple data sources in benchmarking, though consultant databases (49.4%) and general benchmarking data (46.0%) are the most frequently cited. Placing the plan out to bid more than doubled from last year (7.1% in 2016 vs. 18.4% in 2017).

Fewer than half of plan sponsors kept fees the same following their most recent fee review (45%), down from 49% in 2016.

After reducing fees, the next most common activity resulting from a fee assessment in 2017 was changing the way fees were paid. However, that proportion is down significantly from 2016—potentially reflecting the fact that many plan sponsors have already changed their fee payment model.

“Other” increased from last year and included responses such as changing manager practices, eliminating a vendor, and plan structure changes. A few respondents also indicated that the fee review was still in progress; however, fee reductions were expected once complete. One plan sponsor noted: “We have reduced fees repeatedly since 2011.”

Investment management fees are most often entirely paid by participants (85.6%), and almost always at least partially paid by participants (97.5%). In contrast, fewer than two-thirds (62.7%) of plan sponsors indicate all administrative fees are paid by participants—although that is up notably from 50.9% in 2016. Most plan sponsors (82.2%) note that at least some administrative fees are participant-paid. Of those solely paying through an explicit fee, using a per-participant fee continues to be more popular than an asset-based fee, and by a wider margin in 2017.

Revenue Sharing

Representing a noticeable drop from last year, 27.4% of survey respondents pay administrative fees either solely through revenue sharing or through a combination of revenue sharing and some type of out-of-pocket fees. Further, only 14.7% pay solely through revenue sharing (vs. 29.2% in 2016).

Only 8% of plans with revenue sharing report that all of the funds in the plan provide revenue sharing, a small increase from 2016. The most common is to have between 10% and 25% of funds paying revenue sharing, a change from 2016 when the most common was 26% to 50%. One in six (16%) plan sponsors say they are not sure what percentage of the funds in the plan offer revenue sharing.

Over half of plans with revenue sharing have an Employee Retirement Income Security Account (ERISA) account. This is up significantly from 2011, when just over one-third reported having one. The percentage of plan sponsors that do not know if they have an ERISA account increased to 12.5% in 2017.

In most cases (71.4%), reimbursed administrative fees are held as a plan asset. This is down from 80.0% in 2016. Conversely, holding ERISA assets outside the plan increased from 5% in 2016 to 21.4% in 2017.

Communications are the most commonly paid expense through the ERISA account (64.3%), taking over the number one spot from consulting and rebating excess revenue sharing, both of which tied again—but in second place.

Future fee initiatives

Six in ten plan sponsors are either somewhat or very likely to conduct a fee study in 2018. Other somewhat or very likely actions include switching to lower-fee share classes (51.7%) and renegotiating recordkeeper fees (50.5%).

Renegotiating investment manager fees jumped to being in the top five somewhat or very likely activities (39.4%) versus being in the bottom five last year.

More findings from Callan’s survey may be found here.
The Markets January 22, 2018

Embrace of Passive Funds Is Not What It Appears To Be

In conversation with Jeff Kletti, head of investments at Wells Fargo Institutional Retirement and Trust, PLANADVISER gets an inside view of some emerging—and some familiar—defined contribution plan trends.

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As the head of investments for Wells Fargo Institutional Retirement and Trust, Jeff Kletti works closely with Joe Ready, executive vice president and director of Wells Fargo Institutional Retirement and Trust—and a familiar name to readers of PLANADVISER.

Although his purview extends beyond the defined contribution (DC) plan industry, working with Ready, this is a big part of Kletti’s day-to-day work. As such, he was recently called on to help lead a large-scale analysis looking into trends, challenges and opportunities emerging in the firm’s large 401(k) book of business.

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“There were some clear insights to emerge in the DC business,” he says. “In particular, 2017 saw active managers come somewhat back into favor after three years of trailing passive flows. Even so, when we looked across our book, we saw that in general, plan sponsors in the last few years have increased the number of standalone index options in their core menus.”

The offering of standalone index investment options roughly doubled, Kletti says, from two to four options, in the large-client segment of the book. Among mid-sized plans and smaller employers, the trend was somewhat more muted but still clearly visible. 

“And it has been about adding more than just the S&P 500,” Kletti notes. “We’re seeing increased popularity in offering passive international equity, small cap passive, and passive core bond.”

Tepid interest among participants

Importantly, looking at the asset flow data provided by Wells Fargo, there is in fact very little money going into these standalone funds that are being added. Kletti says a number of factors are behind this—first that the investment lineup changes have been additions to plan menus, rather than replacement-reroutes, or “mappings,” as the DC industry parlance goes.

“That approach, of actively mapping participants out of active options into passive options, is still rare on our platform at this stage,” Kletti confirms. “So, the point is, that these active-versus-passive trends are playing out with more subtlety than it might first appear. Virtually all of the ongoing flows into passive funds in our book of business have been coming from within the target-date fund context, not from stand-alone index funds. Within TDFs, that is where the massive shift in active to passive has in fact taken place.”

Again, Kletti points to “a whole confluence of factors” driving the interest in passive target-date funds.   

“Of course a lot of it has to do with the Department of Labor (DOL) fiduciary rule change,” he muses. “And there is just so much concern about overall fees in general, this is pushing more plans to use passive qualified default investment alternatives. Another big part of this has been the performance of the markets in recent years. It has been much easier for plans to make this move towards passive-based defaults, given the performance of index target-date funds.”

In the Wells Fargo book of business, target-date fund (TDFs) assets as a percentage of overall plan assets have now reached 30%. And when selecting specifically for passive options, in just the last three years, the data shows there has been a 30% increase in the number of Wells Fargo-serviced plans now offering a passive target-date fund. Underneath of this, the assets in passive TDFs have doubled.

CITs and passive go together

Turning to his work in the collective investment trust (CIT) space, Kletti points to a very similar ongoing conversation. CITs are increasingly being viewed by plan sponsors as delivering lower fees for the same strategies, he explains.

“We’re also seeing, whether it’s a CIT that we offer or whether it’s a CIT that sponsors are using from an outside manager, the minimum investments needed to enter these collectives are coming down very significantly,” Kletti notes. “That has helped to make CITs to be a hot topic in 2018—they are becoming very much more accessible in the mid-market and the small-plan market as well.”

He says Wells Fargo has found plan sponsors greatly value the fact that, under the state-based CIT regulatory structure, the sponsor of the CIT is considered a fiduciary, “whereas this is not necessarily the case for a mutual fund.”

“There is still some bifurcation among the different market segments on the CIT topic,” Kletti concludes. “The large market is more or less comfortable with CITs already and they have been there for years. But these days, mid-sized plans in the Wells Fargo core market, those in the $50 million to $250 million space, are very quickly coming to have a deeper understanding of and interest in collective trust products.”

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