Fee Transparency, Reasonableness Loom Larger

November 28, 2008 (PLANSPONSOR.com) - Asked to rank the criteria used in selecting their DC plan provider, plan sponsors have reliably opted to put "others" first.

This year, as in every year we have asked plan sponsors to do so in PLANSPONSOR’s Defined Contribution Services Survey , they ranked service to participants as the most important criteria, garnering a ranking of 6.65 on a 7.0 scale. Once again, service to plan sponsors was the second most important (6.50).

Not surprisingly (particularly these days), investment performance was deemed the third most significant, while the financial strength of the provider was ranked fourth. However, the importance of all of these declined slightly from a year ago-though perhaps “not as much as you might think” (see Getting Better – But Not As Much As You Might Think ).

Rising Importance

There was, however, one criterion that actually rose in importance-transparency of fees-which drew an importance ranking of 5.85 from 5.81 a year ago. Transparency notwithstanding, reasonableness of fees remained a high priority (yes, though perhaps not as much as you might think)-in fact, it was deemed more important than transparency (though one might well wonder how you can be sure of the former without the latter), while brand-name funds (which dropped the most of any criterion in importance, and was the lowest ranked criterion in this year’s survey), and the industry knowledge of account managers and the sales force were relegated to near afterthoughts in the rankings.

If there appeared to be some deflationary trends in the weightings, there was an even more ominous trend for providers in the evaluations. A year ago, statement accuracy earned a 6.48 ranking on a 7.0 scale, while loan/withdrawal turnaround garnered a 6.35, and participant reporting timeliness was just behind with 6.34. This year, those same criteria continued to top the evaluation scale, but with rankings of just 6.42, 6.32, and 6.28, respectively.

Despite rapid expansion of target-date funds, and enthusiasm for qualified default investment alternatives (QDIAs), “focus on participant asset allocation” garnered a rating of just 5.74. Still, that put it ahead of the two lowest rated categories of participant service, overall participant education program (5.68) and fees for participant services (5.59-down from last year’s 5.64).

As for plan sponsor services, compliance was the top-performing category, just ahead of industry knowledge of account reps (though one should remember the relative unimportance accorded that knowledge in the evaluation category). The next-to-lowest ranked criterion was fee disclosure (5.73); the lowest was fairness of fees (5.72). Some good news: Staff consistency/turnover was rated 6.04, and responsiveness to problems/inquiries a strong 6.18 on the 7.0 scale (though still down from 2007).

As a general rule, plan sponsors in the micro-plan segment, those with less than $5 million in assets, were happier at all levels than other segments and, while it may be a function of higher expectations, the largest plan sponsors were noticeably less satisfied. Consider that, while responsiveness to problems/inquiries was rated a 6.30 by micro-plans, large-plan sponsors gave their providers an average rating of just 5.68.

Evaluation Frequencies

When it comes to evaluating their DC providers, only about one in four (29%) does so annually, though that is the most common frequency cited. The next most common response (nearly 23%) did so "every three to five years," while about 15% did so every two to three years, and one in eight was on a one- to two-year cycle. Nearly 11% did so every five years (or more), and nearly one in 10 said they "never" formally evaluated the provider.

Those signs notwithstanding, the vast majority-86% of respondents-said that they would recommend their current provider to a colleague; while that was lower than the 89% of a year ago, the decline was relatively modest. One in 10 respondents to this year's survey were not sure if they would recommend (up slightly from 8.3% a year ago), while 4.0% in this year's survey said they would not, compared with 2.7% a year ago.