Following their most recent fee review about four in ten defined contribution plan sponsors (40.5%) reduced fees, according to the 2018 Callan Defined Contribution Trends Survey. Callan says this is a notable increase from prior years (31.6% did so in the prior year’s survey).
The number of plan sponsors that calculated their DC plan fees within the past 12 months rose to 83.1% in 2017 from 78.8% in 2016. Only 5% have not calculated plan fees within the past three years (or are unsure).
More than three-quarters of plan sponsors (77.2%) benchmarked the level of plan fees as part of their fee calculation process, down slightly from last year (79.2%). The percentage of plan sponsors that do not know whether plan fee levels are benchmarked (9.6%) is up from 7.5% in 2016.
In the majority of cases, the plan’s consultant/adviser conducts the benchmarking (82.8%). This is higher than in prior years. Conversely, fewer plan sponsors are benchmarking their own plan fees than in prior years. Plan sponsors tend to use multiple data sources in benchmarking, though consultant databases (49.4%) and general benchmarking data (46.0%) are the most frequently cited. Placing the plan out to bid more than doubled from last year (7.1% in 2016 vs. 18.4% in 2017).
Fewer than half of plan sponsors kept fees the same following their most recent fee review (45%), down from 49% in 2016.
After reducing fees, the next most common activity resulting from a fee assessment in 2017 was changing the way fees were paid. However, that proportion is down significantly from 2016—potentially reflecting the fact that many plan sponsors have already changed their fee payment model.
“Other” increased from last year and included responses such as changing manager practices, eliminating a vendor, and plan structure changes. A few respondents also indicated that the fee review was still in progress; however, fee reductions were expected once complete. One plan sponsor noted: “We have reduced fees repeatedly since 2011.”
Investment management fees are most often entirely paid by participants (85.6%), and almost always at least partially paid by participants (97.5%). In contrast, fewer than two-thirds (62.7%) of plan sponsors indicate all administrative fees are paid by participants—although that is up notably from 50.9% in 2016. Most plan sponsors (82.2%) note that at least some administrative fees are participant-paid. Of those solely paying through an explicit fee, using a per-participant fee continues to be more popular than an asset-based fee, and by a wider margin in 2017.
Representing a noticeable drop from last year, 27.4% of survey respondents pay administrative fees either solely through revenue sharing or through a combination of revenue sharing and some type of out-of-pocket fees. Further, only 14.7% pay solely through revenue sharing (vs. 29.2% in 2016).
Only 8% of plans with revenue sharing report that all of the funds in the plan provide revenue sharing, a small increase from 2016. The most common is to have between 10% and 25% of funds paying revenue sharing, a change from 2016 when the most common was 26% to 50%. One in six (16%) plan sponsors say they are not sure what percentage of the funds in the plan offer revenue sharing.
Over half of plans with revenue sharing have an Employee Retirement Income Security Account (ERISA) account. This is up significantly from 2011, when just over one-third reported having one. The percentage of plan sponsors that do not know if they have an ERISA account increased to 12.5% in 2017.
In most cases (71.4%), reimbursed administrative fees are held as a plan asset. This is down from 80.0% in 2016. Conversely, holding ERISA assets outside the plan increased from 5% in 2016 to 21.4% in 2017.
Communications are the most commonly paid expense through the ERISA account (64.3%), taking over the number one spot from consulting and rebating excess revenue sharing, both of which tied again—but in second place.
Future fee initiatives
Six in ten plan sponsors are either somewhat or very likely to conduct a fee study in 2018. Other somewhat or very likely actions include switching to lower-fee share classes (51.7%) and renegotiating recordkeeper fees (50.5%).
Renegotiating investment manager fees jumped to being in the top five somewhat or very likely activities (39.4%) versus being in the bottom five last year.More findings from Callan’s survey may be found here.