Plan Costs, Investment Selection Top of Mind for Sponsors

The process of selecting and monitoring investment options continues to be a priority for retirement plan sponsors, according to research from Aon Hewitt.

Aon Hewitt found that currently, 83% use an external investment consultant to assist in evaluating and monitoring investment options. Nearly nine out of ten plans (87%) have a written investment policy statement, up from 83% in 2007 and 78% in 2005. Seventy-nine percent of sponsors report that they include a watch-list policy, while 74% include fee-related topics in their statement.  

When it comes to selecting funds, fees and expenses were again rated as the most important factor, with 67% of sponsors indicating it is “very important” up from 59% in 2009. Fund investment process was also noted as very important by 65% of employers. Historical performance fell from the top spot in 2007, and is now third, ranked as very important by 63% of plan sponsors. Name recognition and the availability of fund information in public sources were given lower priorities, and noted as very important by only 8% and 12% of sponsors, respectively.  

The Aon Hewitt survey also found employer concern over fees has persisted in the past two years, with 63% noting they are very or somewhat concerned about fees, given the recent scrutiny by regulators and litigators. However, the percentage of plans that have calculated total plan cost (fund, administrative, and trustee fees) has declined since 2009—with 72% of plans calculating last year versus 84% in 2009. Larger plans, with more than 5,000 employees, were more likely to do so than smaller plans.   

Among those who have not calculated, half (51%) listed complexity as a hurdle, while 23% simply have not made it a priority or have not attempted. Additionally, three-quarters of employers have made efforts to reduce expenses in the past two years, similar to what was reported in 2009. 

Regarding administrative fees, 73% of plans report that participants pay all recordkeeping fees, either directly or indirectly. Just under one-quarter of companies (22%) share the fees with participants, and 5% of employers pay all fees directly. The percentage of employers paying all administrative costs fell from 11% to 5% in 2011.  

In terms of how fees are assessed to participants, 94% do so across plan assets—including 66% through revenue sharing (only), 11% through add-ons (accruals) to funds, and 17% that combine these approaches. Additionally, 14% of plans charge a periodic line-item fee to participants (including 2% that also charge fees over assets). Add-ons as well as line-item charges have been increasingly used to help more equitably share costs with participants on a consistent basis, especially among larger employers.  

Disclosure of fees has become a priority during the past two years, as employers are increasingly using vehicles to illustrate fees, and many are using multiple methods. About half (51%) of plan sponsors say they disclose administration fees in fund fact sheets and/or prospectus information (up from 28%), and now 43% include it with participant account statements (up from 23%). For investment management fees, 85% of plan sponsors note they disclose fees in fund fact sheets and/or prospectus information, up from 60%.

Retirement Income Gains Ground, Employer Stock Stands Ground  

The Aon Hewitt survey found retirement income solutions have garnered significant attention in the marketplace, and more employers are focusing on these services. More than a quarter of plans (29%) now provide or promote some form of retirement income solutions, either inside or outside their plan. 

Facilitation of annuities outside the plan is offered by 18% of plans, while 15% of companies report an in-plan solution today, including managed payout funds (offered by 11% of plans), managed accounts with drawdown feature (8%), and annuity within the plan (8%). Another 6% of employers report that they plan to add at least one of these in-plan solutions during 2011.   

DC-only plans are more likely to provide in-plan solutions–(19%) than companies with both a DC and a DB plan (13%).   

Additionally, nearly three-quarters of plans provide online modeling tools to help employees understand what they can spend each year in retirement (another 5% are very likely to add in coming year).   

Regarding terminated workers/assets, nearly a quarter of employers report they prefer balances to remain in the plan. Larger plans (with more than $1 billion in plan assets) are more likely to have this penchant, with 39% preferring assets to remain in the plan, versus 17% below that threshold. Sixty-seven percent of all plans report they have “no preference.” 

Employer stock is an investment option among 36% of plans surveyed. Larger employers (those with more than 5,000 employees) are more likely to offer the option, with 52% of these firms offering versus only 18% below this threshold.  

Across plans making the investment option available, 93% allow participants to direct their employee contributions in the employer stock fund. The bulk of these plans do not restrict participants, with only 23% of plans restricting participants’ investment in employer stock (by contribution or balance). This is up slightly from two years ago (20%). Among those restricting, increasingly they are doing so at lower thresholds—decreasing the amount of contributions and/or balances that employees may invest in employer stock. The average maximum percentage in contributions is 23%, while the average maximum balance allowable is 22%.  

Fewer employers match exclusively in company stock, and this has continued for many years. Among plans that offer employer stock as an investment option, only 12% require matching contributions to be invested in employer stock, down from 17% in 2009 (and down from 36% in 2005). Further, of plans that do match in employer stock, there are far fewer restrictions associated. In 2011, 90% of plans report that participants may diversify employer-matching contributions at any time, up from 84% in 2009 and 46% in 2005.  

The Trends & Experience in Defined Contribution (DC) plans survey has been conducted every two years since 1991. The 2011 survey was responded to by a record number of employers—546 across a variety of plan types, sizes and industries.