Sponsors Still All Over Fee Issue

October 15, 2008 (PLANSPONSOR.com) - While plan fees remain a red hot issue for plan sponsors, a relatively small number of sponsors say they are likely to switch to cheaper fund alternatives or move their recordkeeper business over the issue.

That was a key result of a new plan sponsor fee survey, according to a news release from Callan Investments Institute Research.

Noting that most sponsors have at least calculated and benchmarked their fees in the last year, the Callan researchers reported that 34.8% of sponsors said they intend to renegotiate their recordkeeping fees and 27.7% are likely to further study the issue.

Of the sponsors who have already conducted a fee inquiry, Callan said more than three-quarters (80.6%) indicated that plan fees are generally in line with expectations, while 13.4% found that fees are higher than expected.

Consistent with the notion of renegotiating recordkeeping fees, the survey found, 21.5% of plan sponsors reported that they are very likely to switch funds within their plan to lower fee share classes. “Fee assessment is increasingly becoming a regular annual part of plan sponsor diligence,” Callan wrote. “Plan sponsors are clearly focused on monitoring and evaluating DC plan fees, many indicating a readiness to challenge the level of fees paid to their recordkeeper and to negotiate a better fee structure. “

But the number of sponsors ready to pull the trigger on the fee issue and jump providers over it comparatively small. Some 13.6% of plan sponsors said they likely will conduct a recordkeeper search in the next year. “This suggests,” Callan declared, “that while fees may be an issue, service level is generally not.”

When it comes to DC plan fees, sponsors say their three main priorities are ensuring that fees are: reasonable (47.8%), monitored and documented (35.8%), and the lowest possible (22.4%).

In the category of other fee-related changes, 11.1% of plan sponsors said they are very likely to unbundle the plan by using collective trusts and/or separate accounts. Only one in 10 (9.7%) sponsors said it is very likely they will reduce or eliminate the use of revenue sharing to pay plan expenses.

Also, Callan said, few plan sponsors are very likely to go to the extreme of moving some or all funds from actively managed to index funds (6.1%).

"This indicates that the trend toward unbundling the DC plan continues at a modest pace . . . plan sponsors are generally not prepared to move aggressively away from the revenue sharing model of fee payment and that partially unbundled plans are far more common than fully unbundled models," Callan commented.

Callan said the survey results suggest that plan sponsors may wish to focus on how equitably fees are paid, utilization of the Employee Retirement Income Security Act (ERISA) account (See PD08. Understanding an ERISA Account ), and whether their use of the recordkeepers' proprietary funds remains appropriate for the plan and its participants.

The study covered 75 DC plan sponsors. Two-thirds (66.7%) of the plans represented are 401(k) plans; another 16% are 403(b)s. Half of the plans in the survey fall within the 5,000 to 50,000 participant range and, while plans range from less than $20 million in assets to over $1 billion, most are over $100 million in assets.

While the majority of plan sponsors (65.3%) reported that the DC plan is the primary employer-sponsored retirement vehicle provided to company employees, most (59.7%) also offer a defined benefit (DB) pension plan to some or all employees, Callan said.