Continued scrutiny by U.S. regulators and legislators on the fees and outcomes of defined contribution plans is pressuring revenues at organizations that provide products and services to these plans and will shape the future of the defined contribution retirement plan market, according to a study, Trends in Retirement/401(k) Plans and Administration by Financial Research Corp. (FRC), a research and consulting firm focused on the investment industry.
“Government regulations have had a profound and varied affect on defined contribution plans and administrators,” said Leslie Prescott, a consultant and author of the study. “For example, the Revenue Act of 1978 essentially launched the industry, and the Pension Protection Act fueled the incredible growth in target-date funds. Currently, as a result of new fee disclosure requirements as well as evolving economics, plan sponsors are focusing on total plan costs and how they can be reduced. Enhanced fee information is becoming available to plan participants, and there is heightening competition among recordkeepers of all types and sizes.”
Spotlight on Plan Costs
FRC analyzed information from the retirement plan database of BrightScope, a financial information company that rates 401(k) plans. This analysis revealed that:
• Total plan participant costs as a percentage of assets vary significantly with plan size.
• The average participant-paid costs as a percentage of assets for the smallest plan groups was more than three times those of the largest plans.
“This shows the impact of scale on the business,” said Prescott. “In our analysis we saw cost disparities where comparably sized plans within an industry often had substantial differences in the actual dollar amount of annual fees that a participant would pay, amounting to hundreds and even thousands of dollars a year. The spotlight on plan costs is causing plan sponsors to seek out and use benchmark data more frequently to uncover opportunities to reduce plan costs, often through plan redesign or change in plan providers.”
Management Fees Impact Investment Choices
The FRC report finds that pending requirements for improved fee disclosure are driving plan sponsors to investigate different investment vehicles, as the understanding of total fees being paid for the management of plan assets increases among plan sponsors and participants—creating the likelihood of demands for cost reductions. As Prescott pointed out, “Both the total amount of plan fees as well as the clarity of the fees are expected to create openings for a wider variety of investment structures beyond basic noninstitutional class mutual funds. We’re seeing innovation and competition among investment vehicles, providing an unprecedented number of low-cost in-plan options. For example, low-cost exchange-traded funds (ETFs) are moving into plans, and fully indexed target-date funds have captured 27 percent of target-date mutual fund assets.”
Competition Up Among Recordkeepers
Prescott sees regulatory forces, along with economic factors, heightening competition among recordkeepers of all types and sizes and across all plan sponsor segments. “We’re witnessing a variety of strategic approaches being made by competitors in efforts to gain scale, which is critical to profitability in this business,” she commented. “According to FRC’s analysis, the independent recordkeepers who hold 15 percent of defined contribution plan assets likely will face the greatest pressure.”
As always, “change leads to both opportunities and challenge,” said Prescott. “With more information available about the costs of their plans to plan sponsors and participants, plans of all sizes will soon be able to evaluate plan management in a way only the largest plan sponsor could before. Asset managers, advisors and recordkeepers must take stock of their own situations and will need to develop fitting strategies to achieve success as the industry moves into a post-fee disclosure era.”
Stephen Miller, CEBS, is an online editor/manager for SHRM.
DOL Aligns Deadlines for Retirement Plan Fee Disclosures, SHRM Online Benefits Discipline, July 2011
Clarity on Fees Coming Soon, HR Magazine, July 2011
401(k) Plan Cost Range Is Moderate for Most Employers, SHRM Online Benefits Discipline, April 2011
SHRM Online Benefits Discipline
SHRM Online Retirement Plans Resource Page