Study Finds Decrease in DC Plan Fees

 

The Investment Company Institute and Deloitte Consulting LLP have found total fees for defined contribution (DC) plans were lower in 2011 than in 2009.

 

Totaling all administrative, recordkeeping and investment fees, the median participant-weighted “all-in” fee for plans in the 2011 Defined Contribution/401(K) Fee Study was 0.78%, or approximately $248 per participant. The data suggest that the participant at the 10th percentile was in a plan with an “all-in” fee of 0.28%, while the participant at the 90th percentile was in a plan with an “all-in” fee of 1.38%.  

The median participant “all-in” fee of 0.78% of assets in the 2011 Fee Study is lower than that observed in the 2009 Fee Study, which was 0.86% of assets. The companies said there are a number of factors that may contribute to the decline in the ‘all-in’ fee between the 2009 Fee Study and the 2011 study.   

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These factors include different samples of plan sponsors; a larger survey population (over four times as large); different asset allocations (some driven by market performance between the two years); and different fee structures within the industry. 

One reason for the lower median “all-in” fee in the 2011 Fee Study versus the 2009 Fee Study may also be related to the relationship between asset-based fees and non-asset-based fees. When plan asset information was collected in the 2009 survey, investment markets had just experienced the turmoil of the financial crisis of late 2008. Since that time, financial markets have rebounded and total plan assets have grown. As defined contribution plan assets grew, the non-asset-based fees would have been spread out over a larger asset base, causing them to fall as a percentage of assets.  

 

(Cont...)

Despite the differences, the study found the two primary drivers from the previous survey continued to be important factors in explaining the variation in fees across plans within the 2011 survey sample. Specifically, the study showed that plan size as measured by number of participants and average account balance were primary drivers of a plan’s “all-in” fee, which was also the case in the 2009 Fee Study.   

In addition to the two plan-size-related primary drivers, the 2011 Fee Study found that the percentage of a plan’s assets in equity investment options was also determined to be a primary driver of a plan’s “all-in”fee. This factor was identified as a secondary driver in the 2009 Fee Study.     

The 2011 study found investment fees make up a significant portion of total plan expenses—84% of the “all-in” fee for the study sample. Findings also showed that equity investment options have higher expense ratios than fixed-income or other asset classes. A regression analysis indicated that a 10 percentage point shift in plan assets into equity investment options is associated with an added 2.6 basis points to the “all-in” fee.   

The Fee Study report is here.

 

New Retirement Plan Proposals Should Include Everyone

Any new retirement income tier adopted by the U.S. government should not just target those without access to a retirement plan, a paper asserts.

 

Researchers from the Center for Retirement Research at Boston College (CRR) point out that only 42% of private-sector workers are covered by any type of employer-provided retirement plan. This lack of coverage creates two types of problems. First, more than one-third of households are not covered at all during their whole work life and are entirely dependent on Social Security in retirement. Given the low level of Social Security replacement rates—particularly for those who claim benefits at 62—this reliance is likely to produce inadequate retirement income, the paper says.    

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Second, with a mobile work force, people are moving in and out of employer-based coverage, leading to modest accumulations in 401(k) plans.   

Clearly, more retirement saving is needed, but the researchers contend that designing simpler plans in the hope that they will appeal to small business has not worked in the past and is unlikely to work in the future. The researchers conclude that the president’s automatic IRAs, Senator Harkin’s Promise Funds (See“Retirement Plan Would Be a Win-Win for Working Families, Employers”) and state proposals to use public-plan infrastructure to improve private-sector coverage are all welcome initiatives, but “given the modest replacement rates from Social Security and the low level of 401(k) balances, the more comprehensive the additional tier the better.”  

The CRR Issue Brief can be downloaded here.

 

 

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