Data & Research September 22, 2016

Most DC Plans Have Fixed-Fee Recordkeeping Arrangements

The asset-weighted average expense ratio for defined contribution (DC) retirement plans is currently 0.42% versus the 2006 level of 0.57%, according to NEPC.
Reported by

The 11th Annual NEPC Defined Contribution Plan and Fee Survey finds the asset-weighted average expense ratio for defined contribution (DC) retirement plans is currently 0.42% versus the 2006 level of 0.57% when NEPC first conducted its study.

Since 2012, investment management fees have dropped from 52 basis points (bps) to 42 bps. Recordkeeping fees have declined from $92 per participant to $57 per participant.

Never miss a story — sign up for PLANADVISER newsletters to keep up on the latest retirement plan adviser news.

Eighty-two percent of plans have re-contracted their recordkeeping fees since 2013, which has led 51% of plans with to have a fixed-fee recordkeeping arrangement, based on the findings.

In terms of plan design, the survey shows that the median number of plan investment options for participants is 22, the same as last year. Among those investment options, target-date funds (TDF) are still the cornerstone of defined contribution offerings, as these turnkey solutions are available in 94% of plans. Furthermore, 88% of plans use TDFs as their qualified default investment alternatives. While much has been written about the growing popularity of “passively managed” investment options, virtually no respondents in the survey are 100% passive.

The survey indicates that 34% of plans include passive TDFs and about 43% of plans have the makings of a passive tier to complement active options. The median number of passive core offerings is three, and 10% of plans added an index fund in 2015 as a new or replacement offering.

Lifetime income offerings are now offered by 5% of plans versus none in 2012. The percentage of plans offering stable value funds remains unchanged at 47%, the same level as 2012. Prevalence didn’t decline significantly following the credit crisis and it hasn’t increased as a result of low interest rates and money market reform.

In 2006, just one in four plans offered brokerage services, and this year nearly half (49%) of plans have this feature, with 54% offering full brokerage and 46% offering only mutual funds. However, only 1% of employees use this feature.

Company stock remains a fixture in retirement plans, offered in 28% of plans. Approximately 60% of public companies offer these securities.

NEXT: Fees for health care sponsors’ retirement plans

NEPC, which advises on $55 billion in health care institutions’ DC plan assets, has tracked health care retirement plan trends as part of its DC Plan and Fee Survey since 2013.

The survey revealed that asset-weighted average expense ratio for health care DC plans is 0.50% (versus 0.42% in corporate DC plans), down from 0.64% in 2013.

Health care DC plan sponsors have been slower than overall DC plan sponsors to shift away from traditional asset-based recordkeeping contracts (30% vs. 51%).

This year’s survey shows that the retirement plan structure for health care companies is evolving to resemble those in the corporate DC space, though varied plan types (e.g., 403(b), 401(a), 401(k), etc.) still presents a complicated landscape. Health care plans are innately more complex, often grappling with larger boards, and extensive merger and acquisition (M&A) activity in this industry also means that health care entities often have multiple plans to contend with.

“Health care plan sponsors are doing yeoman’s work when it comes to adapting to a rapidly changing retirement landscape,” says Timothy Fitzgerald, a consultant on the NEPC health care team. “They’re tasked with managing multiple plans with differing rules, like Hercules wrestling the Hydra. But like corporate America, they are heading in a positive direction for their plan participants today and have made tremendous strides over the last few years.”

The 11th Annual NEPC Defined Contribution Plan and Fee Survey had 117 respondents from DC plans with $127 billion in aggregate assets, representing 1.4 million plan participants. The average plan size of the respondents was $1.1 billion and each plan had more than 12,000 participants.

On September 28 at 11:00 EST, NEPC will be hosting a webinar to cover key findings from its 11th annual Defined Contribution Plan & Fee Survey. Registration is here.
Compliance September 22, 2016

PBGC Issues Final Rule for Late Premium Penalty Reductions

Under the final rule, penalty rates and caps are both cut in half.
Reported by

The Pension Benefit Guaranty Corporation (PBGC) is reducing penalties for late payment of premiums in an effort to reduce regulatory costs and make it easier for plan sponsors to maintain traditional pension plans. 

As premiums have risen, so have the penalties for late payment because they are calculated as a percentage of the premiums.

Never miss a story — sign up for PLANADVISER newsletters to keep up on the latest retirement plan adviser news.

The final rule  implementing the changes first proposed in April, is slated for publication in the Federal Register on September 23, 2016. Under the final rule, penalty rates and caps are both cut in half. For sponsors with good payment histories that pay promptly following notification of late payment, PBGC will reduce the penalty an additional 80%.

The changes apply to both single-employer and multiemployer plans, and will apply to late premium payments for plan years beginning in 2016 or later.

The PBGC explained that currently, it uses a two-tiered penalty structure that rewards self-correction:

  • If a sponsor corrects a deficiency before PBGC notifies them, a lower rate of 1% of the late payment per month is incurred; and
  • If a delinquency is corrected only after the company is notified, PBGC charges a higher rate of 5%.

Penalties in the first category are capped at 50% of the late amount, and in the second category, 100%.

The following example illustrates how the new rule differs from the old rule. Consider a situation in which a $100,000 premium is paid two months late.

  • Scenario 1 (“self-correction”) – The plan discovered the underpayment and corrected it before PBGC sent notice. Under the old rule, PBGC would have assessed a $2,000 penalty (1% x $100,000 x 2 months). Under the new rule, the penalty is half that amount, or $1,000 (0.5% x $100,000 x 2 months).
  • Scenario 2 – The payment was made after PBGC notified the plan that it was past due. Under the old rule, PBGC would have assessed a $10,000 penalty (5% x $100,000 x 2 months). Under the new rule, PBGC will assess a $5,000 penalty (2.5% x $100,000 x 2 months).

In addition, if the sponsor has a good payment history and pays promptly after being notified of the underpayment, PBGC will automatically waive 80% of that amount reducing the penalty from $5,000 to $1,000.

“We’re committed to reducing the regulatory burdens of sponsoring a pension plan,” says PBGC Director Tom Reeder. “This change is one of the ways we can help employers that are keeping their defined benefit pension plans and providing the security of lifetime income for workers and retirees.”

«