An annual research report from NEPC, the large national pension consultant, celebrates its 10th edition this year by looking back at a decade of changes in the defined contribution retirement plan arena.
The world was a completely different place in 2005, not just for defined contribution retirement plans. Internet users were just being introduced to YouTube, for example, and the housing and equities markets still had a lot of ground to gain before 2008 and 2009.
Ross Bremen, an NEPC partner who pilots the DC plan research effort each year, says the tone of the discussion about America’s retirement planning was also different then, though many of the particulars remain the same—fees, risk and preparedness. Bremen notes that he joined NEPC in 2005 and has guided the DC Survey ever since, giving him helpful insights into the data collected year over year from more than 100 trendsetting plan sponsors.
Bremen tells PLANADVISER the report delves into “all aspects of DC plan evaluation” and shows clearly that plans and participants are generally in better shape today than a decade ago. Fees are lower and there is improved transparency in the wake of headline-grabbing litigation, the Pension Protection Act (PPA), fee disclosure regulations and now the Department of Labor’s fiduciary rule reform.
The high-level stats from the NEPC report are particularly impressive, with estimated annual costs for DC plan admiration dropping from $118 per participant/year in 2006 to $64 contracted for 2015. In just the last year recordkeeping pricing has fallen 9%, Bremen says. While the numbers for 2015 consider contracted fees rather than final paid fees, and so cannot be directly compared with earlier numbers without accounting for fee offsetting via plan expense reimbursement accounts, the final figures are not expected to be dramatically different.
The broad improvements in Americans’ retirement outlooks driven by auto-enrollment and auto-escalation post-PPA are remarkable given that a global financial crisis wrecked peoples’ wallets and job prospects during the time period in question, Bremen says. Part of the improvement is vastly more common use of automatically diversified qualified default investment alternatives, in place at fully 95% of plans in 2015.
NEXT: Fee compression can’t go on forever
Overall, NEPC finds DC plan participants have seen strong improvement across three critical plan metrics since 2005: costs, investment structure and service features. Especially in the last several years, the number of plans paying for recordkeeping according to a flat-fee per participant has skyrocketed, reaching 47% in 2015 after clocking in at just 29% in 2014.
“Recordkeepers and investment providers have been accommodating to the new focus on fees and fiduciary issues,” Bremen says, “but they have a limit to how far they can go. It simple economics, if fees go too low service quality will have to follow. We’re going to see in the next decade that service providers need to be permitted to innovate and reinvest their profits if we want service to improve materially. At some point, if plan sponsors only focus on low fees for the sake of low fees, it starts to do a disservice to participants.”
Bremen points back to his early days in the financial services industry, even before his time at NEPC, to highlight what he calls the cyclical nature of the retirement planning and investing industries.
“Anecdotally, when I first started out back in the 1990s there was a lot of innovation in the recordkeeping space, in large part because margins were higher, and then to the extent that we have seen fee compression we have also seen recordkeepers consolidate and really gravitate towards very similar low cost models,” he explains. “The DC plan administration industry as a result is very different from what it was and what it could be.”
The numbers suggest ongoing fee compression doesn't have much more room to run before a critical mass of advisers, recordkeepers and plan sponsors start to push back. From the plan sponsor's fiduciary perspective, low fees are only as good as the quality of service delivered, and eventually litigation or regulation could come into play claiming plan officials should have been willing to invest more to promote optimal outcomes for plan participants. As Bremen concludes, there has to be a middle ground reached at some point.
Additional research results from NEPC are available here.