DC Plans Making Fee-Focused Changes

Increase in recordkeeper search activity, movement to institutional fund structures, de-emphasizing revenue sharing and adoption of fee policy statements were found in a survey of DC plan sponsors.

Callan’s 10th-annual “Defined Contribution Trends Survey” reveals that fees are playing a heightened role in driving plan sponsor decision-making.

Reviewing plan fees was cited as a key area of fiduciary focus, both now and for the foreseeable future. Also related to this focus on fees are trends including an increase in recordkeeper search activity, movement to institutional fund structures, de-emphasizing revenue sharing, and adoption of fee policy statements.

“Plan sponsors described their review of plan fees as ‘continuous’,” says survey co-author and DC consultant Jamie McAllister. “This includes both investment fees and recordkeeping fees. Recordkeeping searches often result in fee reductions. As a quarter of our survey respondents said that they were very or somewhat likely to conduct a recordkeeper search in 2017, this implies that fee pressure will continue.”

When Callan first asked the question, in the 2012 survey, defined contribution (DC) plan sponsors reported that the majority of participants paid administrative fees solely through revenue sharing (36%) or partially through revenue sharing (30%). In 2016, just over one-third (38%) said revenue sharing was used in any way to pay such fees.

“In 2012, plan sponsors had fewer fee payment options,” says Lori Lucas, CFA, survey co-author and Callan’s DC practice leader. “Today, there are far more mutual funds and daily valued collective investment trusts (CITs) without revenue sharing, and even when there is revenue sharing, plan sponsors can rebate it back to plan participants in ways that weren’t previously available.”

Plan sponsors’ movement away from mutual funds to CITs is also primarily driven by fees. Nearly two-thirds of DC plans offered CITs in 2016, up from 48% in 2012. Meanwhile, mutual funds have decreased in prevalence from 92% to 84% over that same period.

Fees are also driving the increased use of indexed funds. In 2016, far more plan sponsors reported increasing the proportion of passive funds in their plan (12%) than increasing the proportion of active funds (2%). In addition, more than 47% of plan sponsors have a written fee payment policy in place, either as part of their investment policy statement (21%) or as a separate document (26%). This is the highest rate ever recorded in Callan’s survey.

NEXT: Plan design and investment findings

Callan’s 10th-annual “Defined Contribution Trends Survey” also found the use of automatic contribution escalation increased markedly over the past year (63% in 2016 versus 46% in 2015). Caps on automatic contribution escalation have also markedly increased, from 19% in 2015 to 27% in 2016.

Nearly half (47%) of plan sponsors reported making a fund change due to performance-related reasons. This is the highest in the survey’s history. Large cap equity was the most commonly replaced fund. Plan sponsors also took action with their target-date funds in 2016, most commonly cited was evaluating target-date suitability (67%) as the most prevalent course of action.

In addition, the survey found that largely in response to money market reforms going into effect, 64% of respondents have changed to a different money market fund or eliminated their money market fund altogether.

As for the Department of Labor’s fiduciary rule will, DC plan sponsors believe it will primarily impact the plan’s printed materials, website, and other educational materials (43%) and communication regarding plan rollovers (43%).

Callan has published the “Defined Contribution Trends Survey” each year since 2007. This year 165 U.S. DC plan sponsors responded, with more than 80% having more than $100 million in assets.

A summary of key findings may be accessed here.