TDFs Under Microscope as Plan Sponsors Focus on Fees

Callan’s 2014 DC Trends Survey found plan sponsors reviewed plan fees, ensured compliance with Department of Labor (DOL) disclosure requirements, updated their investment policy statements and reviewed compliance with Employee Retirement Income Security Act Section 404(c).

Lori Lucas, CFA, Callan’s Defined Contribution Practice Leader, tells PLANSPONSOR it was a little surprising how much activity is happening in DC plans for target-date funds (TDFs). “We’ve seen an increase in searches, so I was expecting a little increase in activity, but we found it to be substantial; more than one-third [of respondents] said they were planning to change [target-date] funds or managers,” she says.

According to the survey findings, the increased activity may be, in part, due to the release of DOL tips for TDFs in 2013 (see “EBSA Offers Tips for Selecting TDFs”). Lucas notes that the survey found 11.5% of DC plan sponsors used custom target-date funds in 2013, and 13.6% say they will do so in 2014. She points out that the DOL requested specifically that plan sponsors look at whether non-proprietary funds were right for their plans.

However, according to Lucas, also noteworthy in the survey findings was the increase in the use of indexed funds within TDFs, actively managed funds make up less than 30% of TDFs used plan sponsors now. Lucas says this is primarily driven by fees.

The survey found a similar trend of the increase in the use of indexed funds within plans’ core investment lineups, she adds. The percentage of plan sponsors that offer an active/passive mirror (i.e., where major asset classes are represented by both active and passive funds) jumped from 12% in 2012 to 21% in 2013. In 2014, 24% of plan sponsors aim to increase the proportion of passive funds in their DC plan lineup.

“There is still a lot of work to be done,” says Lucas. “The work started in 2012 is still going on; plan sponsors are still working on reducing fees and looking at ways to pay fees differently—for example, we are seeing more bundling of services. But, the process takes time and it will continue to transform plans in many ways, not only affecting funds, but services.”

The survey found plan fees are facing downward pressure in other ways. Compared to previous years, in 2013 more plan sponsors knew the proportion of funds in their plans that pay revenue sharing (2.6% did not know in 2013 versus 6.8% in 2012), whether the plan has an expense reimbursement account (no plan sponsors did not know in 2013 compared to 12% in 2012) and how revenue sharing is disclosed to plan participants (“don’t know” responses declined from 17.8% in 2012 to 2.9% in 2013). Plans that offer potentially lower-cost separate accounts (50.6% in 2013 vs. 42.5% in 2012) and collective trust investment vehicles (51.9% vs. 48.3%) increased, while the use of mutual funds decreased (85.2% vs. 92%).

Callan fielded the 2014 DC Trends Survey in the fall of 2013. Most of the 107 respondents were from large and mega 401(k) plans, but there was a notable representation from governmental and other nonprofit plan sponsors.

The survey report is only available to Callan clients.