A new survey report from Penbridge Advisors finds the largest expenses paid by defined benefit (DB) plan sponsors are attributable to the broad category of investment management—especially in the areas of alternative investments and active management.
The findings are from Penbridge’s Defined Benefit Expense Survey, which follows the ongoing expenses and management practices of a set of 22 corporate DB sponsors in the United States. Data from the rolling survey shows that on a weighted average basis, pension investment management expenses were even higher than they are when measured on an unweighted average basis. This reflects relatively higher investment expenses paid by the largest plan sponsors, Penbridge says, most likely due to their higher allocation to alternatives and their greater use of active management.
The second-highest cost faced by DB plan sponsors comes in the form of Pension Benefit Guarantee Corporation (PBGC) premiums, followed closely by the cost of internal administration. Other significant expenses include trust and custody, investment advisory services and actuarial consulting.
While large plans pay more for investment management, their total expense ratios tend to be lower than their smaller counterparts. According to Penbridge, most plans’ total expense ratios are between 0.50% and 1.50%, while the average expense ratio for all plans was 0.97%. When calculated on a weighted basis (i.e. based on plan assets), the average expense ratio was even better, at 0.73%. Penbridge says the numbers clearly indicate that larger plans operate more efficiently, despite facing investment costs that are often higher than their smaller counterparts.
Up Next: Who Foots the DB Plan Bill?
Penbridge finds the sources of payment for investment management, PBGC premiums and the numerous other pension plan expenses vary widely by plan. Survey respondents identified both plan assets and direct payment from plan sponsors as significant sources of payment for each plan expense category.
“These findings indicate that a complete view of a DB plan’s expenses is not available on a Form 5500,” the survey report explains. “Interestingly, in every expense category there are some plan sponsors who pay those expenses entirely from plan assets, and there are some who do not use plan assets at all. Relatively few expenses are paid partially from plan assets.”
In another important finding, Penbridge shows in-house pension management resources are seriously constrained. The average internal headcount devoted to DB plan management for all plan sponsors that participated in the survey was 2.5—compared with 3.8 for plans more than $1 billion; 2.1 for plans with $100 million to $1 billion; and 1.8 for plans less than $100 million.
“Anecdotally, sponsors across the size spectrum communicated an ability to focus only on the highest priority activities,” Penbridge notes. “Many of the plan sponsors that participated in the survey acknowledged the time spent completing the survey was extremely valuable in enhancing their benchmarking efforts, identifying potential cost savings, and improving overall plan governance.”
The survey results are based on comprehensive DB plan expenses gathered from 22 plan sponsors representing $52 billion in plan assets. Additional findings and informative graphics are available here.