Defined contribution (DC) retirement plan sponsors are not fully knowledgeable on fee issues, according to retirement plan consultancy's Callan Associate's 2012 Defined Contribution Trends Survey: Where Have We Come from and What Lies Ahead. The survey was conducted in fall 2011 among U.S.-based companies with more than $85 billion in assets.
Regarding the complicated process known as revenue sharing—the behind-the-scenes transfer of revenue from investment funds to the plan recordkeeper as an incentive to include the fund on the plan's investment menu—the survey revealed that:
• 19.4 percent of surveyed plan sponsors did not know what proportion of their funds paid revenue sharing.
• 37.5 percent that credited excess revenue-sharing back to plan participants did not know how this happens.
• 16.1 percent were uncertain if their plan offered an Employee Retirement Income Security Act (ERISA) expense reimbursement account (a cash account within the 401(k) used by some plans to capture amounts that investments pay out in revenue sharing beyond what is needed to run the plan administration).
"It's clear that DC plan sponsors appreciate the importance of understanding plan fees, but our survey results indicate that some have quite a way to go to truly comprehend how plan fees work," said Lori Lucas, DC practice leader at Callan. "The number of sponsors that are unclear about the status of their plan's fees is remarkable—especially in light of the Department of Labor's new fee regulations."
Although the U.S. Department of Labor's (DOL) 408(b)2 fee disclosure regulations—governing disclosure by vendors to plan sponsors—are set to take effect on July 1, 2012, Callan found that sponsors were not tremendously concerned about complying with them. While their leading compliance concern was the "lack of clarity on how to comply," coming in a strong second was "no concerns" about compliance.
"It's natural that many plan sponsors would say there is lack of clarity on how to comply with the service provider fee regulation, as the final regulation still hadn't been published [as of January 2012]. However, it was somewhat surprising to find that 'no concerns' ranked so highly," said Lucas. "Fund sponsors seem very confident that recordkeepers will do what is necessary to comply with the 408(b)2 fee regulation. But it's important to remember that the buck stops with plan sponsors when it comes to compliance."
More Adopt Roth Accounts
Another interesting trend was the growing use of Roth designated accounts, funded with after-tax contributions and providing tax-free distributions during retirement. A majority (53.8 percent) of DC plans offered Roth accounts to participants in 2011—up from 49.3 percent in 2010. In-plan Roth conversions from traditional 401(k) accounts were popular as well: 55 percent of plan sponsors that offered a Roth account option also offered in-plan Roth conversions. In contrast, growth in auto-enrollment and auto-escalation features stagnated at around 50 percent and 35 percent respectively.
"While adding automatic enrollment or automatic contribution escalation may increase the cost of a DC plan, it is generally inexpensive to add a Roth feature—this may account for the continued growth in popularity of Roth accounts," added Lucas. "In a challenging economy, Roth accounts can be a cost-effective way of improving the appeal of the DC plan."
Investment Structures and Fund Due Diligence
After fund fees, the second most popular area of focus was investment structure, the survey indicated. As in prior years, a majority (58.5 percent) of plan sponsors conducted an investment structure evaluation in 2011—suggesting that the typical DC plan's investment structure is reviewed on a fairly regular basis. According to 52.7 percent of respondents, the most common reason for conducting an evaluation is to identify gaps and overlaps in fund lineup; diversification followed at 45.9 percent. In addition:
• One in three (31.5 percent) plan sponsors replaced a fund or manager in 2011 because of performance. Most affected were large cap domestic equity funds.
• Treasury inflation-protected securities (TIPS) funds and "real return" funds (intended to offer inflation protection with TIPS and additional assets such as commodity futures) were the most added fund type in 2011, but TIPS were added at three times the rate of real return funds.
• Plan sponsors that changed their actively managed/passive index mix of funds increased their use of passive funds far more than increased their use of active funds in 2011.
Lucas observed that increased focus on passive funds is likely tied to heightened attention to fees. "Use of index funds in DC plans is another way that plan sponsors can manage high fees. This is especially the case in asset classes where it is difficult for fund managers to add value, such as large cap core," she noted.
Stephen Miller, CEBS, is an online editor/manager for SHRM.
DOL Final Rule Extends Deadlines for Service Provider and Participant-Level Fee Disclosures, SHRM Online Benefits Discipline, February 2012
In 2012, 401(k) Disclosures Will Shine a Light on Fees, SHRM Online Benefits Discipline, January 2012
On PPA's 5th Anniversary, Big Impact Seen on 401(k)s, SHRM Online Benefits Discipline, December 2011
Control 401(k) Costs with a Zero Revenue-Sharing Strategy, SHRM Online Benefits Discipline, September 2010
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