Renegotiated ​401(k) Plan Fees Fall to All-Time Low

81% of plans have renegotiated their fees since 2013

By Stephen Miller, CEBS Oct 3, 2016
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Recordkeeping and investment management fees continue to decline for 401(k) and similar defined contribution plans.

"Plan sponsors continue to look for ways to promote fairness and transparency," said Ross Bremen, partner at Boston-based NEPC LLC, an investment consulting firm that recently published the results of its 11th Annual NEPC Defined Contribution Plan and Fee Survey. "The majority of plans in our survey are now contracted on a fixed-dollar basis. While most plans still have some level of revenue-sharing, we are seeing plans of all sizes looking for ways to reduce reliance on it," he noted.

Revenue-sharing is the behind-the-scenes transfer of revenue from plan participants' investment funds to the firm providing administrative and recordkeeping services for the plan. This reduces or even eliminates the need for plan sponsors to make direct payments to their recordkeeping vendor for services such as quarterly statements and day-to-day administration, but it does so by reducing the value of participants' holdings.

The survey, conducted earlier this year, had 117 respondents from defined contribution plans with $127 billion in aggregate assets, representing 1.4 million plan participants.

"The fact that plan fees are at their lowest level in a decade gets a lot of attention," Bremen added. "We thought this might be the year that fees level out. While lower fees reflect the good work sponsors have done to reduce fees on participants' behalf, at some point service levels could suffer. A race to the bottom, at the risk of sacrificing service and innovation, is not in the participants' best interests."

According to the survey:

  • The average asset-weighted expense ratiofor providing record-keeping services to defined contribution plans is currently 0.42 percent, versus the 2006 level of 0.57 percent.

  • Contracts for their record-keeping fees have been modified by 82 percent of plans since 2013, which has led 51 percent of plans to adopt a fixed-fee record-keeping arrangement, in which record-keeping vendors charge plan sponsors a flat-dollar amount per each participant to pay for plan services.

In terms of plan design, the survey shows that the median number of plan investment fund options for participants is 22, the same as last year. Among those investment options, target-date funds are still the cornerstone of defined contribution offerings, as these turnkey solutions are available in 94 percent of plans. Furthermore, 88 percent of plans use target-date funds as their qualified default investment alternatives.

Other survey findings include:

  • Lifetime income offerings, such as an in-plan annuity option, are now an option with 5 percent of plans, versus none in 2012.

  • Brokerge widows that allow participants to select from a broad array of publicly available investment options were offered by just 1 in 4 plans in 2006, but this year almost half (49 percent) of plans had this feature, with 54 percent offering full brokerage and 46 percent offering only mutual funds. Still, only 1 percent of employees use this feature.

  • Company stock remains a fixture in retirement plans, offered in 28 percent of plans. Approximately 60 percent of public companies offer plan participants their own stock as an investment options.

 "The lifetime income figure is one to watch. There is no question that it is taking time for sponsors to get comfortable with the current solutions," Bremen said, "but we predict this trend will continue. Look for a focus on innovation in the areas of lifetime income and financial wellness to continue."

Index Funds on the Rise

Low-cost index or "passive" funds continue to gain prominence in defined contribution plans, the survey showed, although higher-fee actively managed funds still predominate.

The median number of index funds among core offerings is now three, and 10 percent of plans added an index fund in 2015 as a new or replacement offering.

In addition, 34 percent of plans include passive target-date funds, made up entirely of index funds, and about 43 percent of plans have the makings of a passive tier of index funds (such as a large stock S&P 500 index fund, a midsized and small stock "extended market" index fund and an international index fund) to complement their actively managed fund options.

Don't Forget Investment Advisors' Fees

Trisha Brambley, CEO of Retirement Playbook, a Philadelphia-based provider of due diligence services for plan advisor selection, agreed that "recordkeeping and investment fees will continue to decline as fees become more transparent and plan sponsors seek to avoid litigation due to excessive fees. That said, plan sponsors must bear in mind that these aren't the only fees that need to be kept in check. It's critical that plan advisor fees are scrutinized with equal rigor."

Experienced and qualified advisors can provide excellent value, she noted, "Yet many plan sponsors are still unaware of how much their plan advisor is paid and how he or she is compensated. Plan sponsors also have a fiduciary obligation to make sure their plan advisor fees are considered 'reasonable'—especially with the Department of Labor's new fiduciary rule going live in April 2017. 

More Plans Are ‘Unbundling’ from Their Recordkeepers

Defined contribution plans are "unbundling" and moving to an open investment lineup independent of the financial firm that provides administrative and recordkeeping services for the plan, reports Pensions & Investments.

Under a traditional "bundled" arrangement, investments in the plan are wholly or mostly the proprietary funds managed by the plan's recordkeeper, whereas in an "unbundled" arrangement fund selection and plan services are kept distinct, separating recordkeeping and investments so that few if any of the plan's funds may be those of the recordkeeper. Advocates of unbundling believe that it promotes the selection of lower-cost funds for participants.

Consultancy Willis Towers Watson found that last year 63 percent of defined contribution plans had unbundled arrangements, up from 52 percent in 2014, according to a survey of the firm's clients.

Similarly, investment consulting firm Callan Associates found last year that only 14.2 percent of plans in its survey had fully bundled strategies, down from 22.7 percent in 2011.

Related SHRM Article:

How the Fiduciary Rule Affects Retirement Plan Sponsors, SHRM Online Benefits, April 2016

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