Do Sponsors Know Plan Fees?

In this new age of fee disclosure, it may be surprising to some that more than one-quarter (26.6%) of respondents to PLANSPONSOR’s 2013 Defined Contribution (DC) Survey do not know the approximate average expense ratio of all investment options in their plans.

Not quite as surprising is the fact most of the respondents who do not know are among the smaller plan sizes group. On average, 38% of respondents with plan sizes less than $25 million do not know the average expense ratio of all plan investment options. This compares to 13% of respondents with plan sizes greater than $50 million.

The survey also found, for the 2012 plan year, only 55% of respondents calculated the total fees (all sources) paid to their DC providers/recordkeepers. Among those who calculated fees, 68.7% benchmarked their fees against similar plans. It is important to note that 2012 was the first year fee disclosures were formally required by the U.S. Department of Labor, but Brian O’Keefe, director of Research and Surveys at Asset International, publisher of both PLANADVISER and PLANSPONSOR, finds these results surprising.

“In today’s world, consumers have become very adept at price comparison shopping for products and services, so I somewhat expected sponsors would exhibiting similar behavior related to the services they are paying for from administrative providers,” he says.

O’Keefe notes another concern might be the objectivity of the comparisons that are being used as a combined 70% of those who calculated fees and benchmarked their fees against similar plans used either their current recordkeeper (27.1%) or their current adviser (43.0%) to benchmark their administrative costs. “Although recordkeepers and advisers may have access to data from other clients, that data may have a selection bias in that it shares a connection to the recordkeeper/adviser, so sponsors should make sure they understand the source of the comparative data,” he adds. “Contracting an independent company with no affiliation to the plan provides the highest level of comparison certainty, but only about one in ten (11%) of respondents to the survey pursued this strategy.”

According to PLANSPONSOR’s "2014 Plan Benchmarking Report," overall, 26% of DC Survey respondents indicated the average expense ratio of all investment options in their plans is 50 basis points (bps) or less. Thirty-seven percent report their average expense ratio is greater than 50 bps to 100 bps. More than 10% said their average is greater than 100 bps. As expected, a greater percentage of smaller plans than larger plans have higher fees; 15% of plans of sizes $50 million or greater indicated their average expense ratio is greater than 100 bps, compared to 64% of plans of sizes less than $50 million.

Overall, two-thirds of respondents indicated they formally review actual administrative costs/fees annually. More than 10% said they do so every one to two years, and 9.9% do so every two to three years. Four in ten (41.5%) of DC sponsors, overall, reported their organization pays for plan administrative/recordkeeping costs not covered by investment revenue. Twenty percent said participants pay via fixed costs billed to their accounts, and 17.8% say participants and their organizations share the costs. Nearly 13% said all plan fees are paid via revenue sharing.

Four in 10 DC Survey respondents indicated their advisers are paid a percent of plan assets, 21.7% said advisers are paid a monthly/annual retainer, and 4.3% reported advisers are paid a per participant fee. One-quarter of DC plan sponsors do not know their advisers’ fee arrangements.

The "2014 Plan Benchmarking Report" features proprietary data collected in late 2013 by PLANSPONSOR in its annual Defined Contribution (DC) Survey. The report highlights various plan design features and outcomes of more than 5,300 U.S. DC plans. Information about how to purchase the report is here.