Cover:2004 DC Survey

Eye on the Prize: No signs of panic

» Fee Fie

» More, Different Advice

During one of the more tumultuous years in the industry's history, plan sponsors—and the participants whose retirements they help support—are offering more than ever. On average, participants have access to more funds, more advice, more defined benefit plans, and more Internet services, and are more likely to have a larger company match than we found in last year's survey.

This year, of course, has been more than usually trying for plan sponsors but, for the industry overall, the heightened awareness and attention paid to fiduciary concerns is seen by most as a good, if stressful, turn of events. That heightened awareness also is borne out in a telling statistic among the participants in PLANSPONSOR's eighth annual defined contribution services survey. A record number (nearly 75%) of a record number (roughly 4,000 plan sponsor respondents) now have a written investment policy statement to guide their efforts. Larger plans continue to be more likely to have these than smaller programs but, incredibly, one in five of the largest plan respondents, those with more than $200 million in assets, apparently does not yet have one.

That statistic is particularly telling in times such as the year just past when events like the mutual fund trading scandal provide a unique impetus to reassess the actions appropriate to a process of prudence in evaluating plan options. Still, it will be surprising to some to discover that the trading scandal has failed to push hordes of DC plans to the warm embrace of a nontainted provider. In fact, more than half the respondents to this year's survey, some 51%, said they had made no changes to investment policy, the way their plan chose funds, or the process for monitoring fund performance.

Even among those that made changes, the shift was largely toward information requests and heightened scrutiny, not provider terminations. Roughly a quarter had increased their oversight, for example, while a comparable number had sought the recommendation of either their advisor or provider on the matter. Less than 5% chose to select a new provider or a new advisor as a result of the trading scandal. So much for panic.

About one in eight had increased the information provided to participants, while a nearly identical number had increased fund options. Of course, plan sponsors have been slowly, but surely, expanding their fund menu for years. In 2004, the average number of fund options was 18.6, up from 16.7 a year ago. Larger plans tended to have more options (28.7 versus 16.9 among plans with less than $5 million in assets) but, despite the larger menu, the average number of fund choices actually used by participants in the largest plans was a full fund choice less than those at smaller plans—just four funds, on average, versus five.

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Fee Fie

Fees remain a sensitive issue, but appear to be well in hand for most of this year's respondents. More than half (55.3%) said that the approximate annual cost for maintaining the plan was less than 1% of plan assets, excluding fees charged to participant accounts. Nearly four in 10 said that the approximate annual cost charged against participant accounts as investment management or other fees was less than 1% of participant accounts. However, more than 15% said they "didn't know" the approximate annual cost of maintaining the plan, and 17% said they "didn't know" the approximate annual cost charged against participant accounts—statistics that appear to belie the dramatically heightened emphasis on fees as a fiduciary concern, both in the media and from regulators.

It is not surprising, therefore, to find that "fee fairness" and "fee disclosure" ranked at the bottom of the plan sponsor service rankings, as it did a year ago. Service rankings on contribution splits, check processing, and responsiveness topped that list, but all slipped very slightly in terms of overall evaluation. Account representative expertise, discrimination testing, and accuracy/timeliness of 5500s all moved up noticeably in plan sponsor evaluations.

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More, Different Advice

Along with those additional fund choices this year, plan sponsors were more likely to offer participants access to advice. Nearly half (49%) of plan sponsor respondents now offer that service to participants, up from 43% a year ago, and just 37% in 2002, as a growing number of plan sponsors seem to be more worried about not offering that support to participants than about the potential litigation of doing so. It may be premature to describe the current status as a "tipping point" in terms of offering participant advice, but the trend line is impossible to ignore.

Yet another dynamic is, no doubt, accelerating the trend: the expanding role of the DC service provider itself in providing access to financial advice. Nearly a quarter of the plan sponsors providing participants with access to investment advice do so via their DC services provider, compared with 16% doing so via a financial planner/advisor outside the plan, and just 7% through a third-party advice provider (although a number of the DC providers do rely on the support of those third parties).

Still—and this is a significant point—participation rates were higher in 2004 than last year, snapping a two-year streak of declining participation rates. However, while the rate was higher, it was not yet back to 2002 levels. That may, in part, explain a continued dissatisfaction with participant communications relative to other service levels. In fact, "overall participant education program" again drew the lowest satisfaction ranking in our survey, while participant communications materials and call centers failed to fare much better.

Among strategies to expand participation further, automatic enrollment appears to be enjoying a resurgence, with nearly 20% now employing the strategy of requiring participants to "opt out" of participation, rather than requiring an affirmative election. Larger plans were more likely to do so, but the trend was higher across all market segments.

Only half as many plan sponsors were contemplating a change in the company match this year as last but, where a change was contemplated, they were more likely to be increasing it than the other way around. The most common match, cited by more than a third of the respondents, was less than 50% on the first 6% deferred, but that level was significantly more common among smaller plans than among those with more than $200 million in assets. Nearly as many (30.2%) are matching at the rate of 50% of the first 6%.

The quality of service to participants continues to be the top priority of plan sponsors in selecting and evaluating a DC plan provider, with survey respondents according it a ranking of 6.77 on a 7.0 scale. Service to the plan sponsor was second, while investment performance, financial strength of the provider, and variety of investment options rounded out the top five. Market image/reputation was only eighth on the list—but it jumped to a 5.91 ranking from just 5.81 a year ago on that same 7.0 scale.

This year, for the first time, we asked plan sponsors about how they monitored investment policy compliance and investment performance and, for the most part, they seem to be personally involved in the process. Nearly half (48.9%) said either they, another company employee, or a plan committee monitored policy compliance, while less than half that number said they relied on a separate outside consultant or advisor. Nearly 19% relied on their DC plan provider for that review, while 10% turned to the investment advisor that administers their plan.

On the issue of investment performance monitoring, plan sponsors relied on multiple methods. Roughly 40% each cited a review of regular fund reports by someone at the plan sponsor and scheduled review meetings with a rep from the plan provider. Nearly 30% did so via scheduled review sessions with a separate consultant or advisor, while roughly a quarter said performance reviews were included with participant statements. About 16% did so via scheduled review sessions with the advisor who sold the plan. However, more than 10% admitted that there was no formal process for reviewing fund performance.

When all is said and done, plan sponsors appear to have weathered the litigation storms, heightened fiduciary concerns, and ongoing consolidation among providers with remarkable aplomb. Defined contribution providers continue to raise the bar in terms of product function/feature and service support. A good thing, too—since plan sponsor expectations seem unlikely to slacken anytime soon.  

View 2004 DC Survey Results

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Nevin Adams
editors@plansponsor.com