Asked their top three retirement plan issues, 49% of sponsors first cite complying with regulations,
followed by reducing plan costs (47%), and reevaluating the investment menu
(45%), according to a new report from Cogent, “Navigating Change in the 401(k)
Market: Key Insights for DC Plan Providers and Investment Managers.”
“In what may be a warning for incumbent providers, one quarter (25%) of plan sponsors intend to reevaluate their plan provider in the next 12 months, up from 18% in 2014,” Cogent said.
Fully half (50%) of plan sponsors intend to make some kind of change to their investment menu in the next 12 months, and 35% expect to change the mix of plan investments.
In terms of how the fee disclosures have impacted plan
sponsors’ relationships with their providers, 55% say they will maintain the
fee arrangement they have with their current plan provider. However, 22% plan
to request fee reductions, 14% intend to change bundled fees to direct fees,
and 13% plan to issue a new request for proposal (RFP) for recordkeeping
As to how the fee disclosures have impacted sponsors’ treatment of investments, 31% are now benchmarking the plan investment fees on a regular basis, 25% are negotiating lower fees for existing investment options, 12% have changed some or all funds to lower-fee share classes, 12% have either reduced or eliminated revenue-sharing arrangements, 10% have consolidated the plan investment menu, 9% have considered a multi-manager options, and 5% have mulled a collective trust.
NEXT: Plans to switch plan providers
Perhaps most surprisingly, Cogent says, 75% of plan providers
say they are at least somewhat likely to initiate a formal review of their
401(k) plan over the next 12 months. Among this subgroup, 15% say a switch in
providers is highly likely, and 50% say it is somewhat likely. Thirty-six
percent are certain they will not initiate a change in providers in the coming
All plan sponsors are regularly evaluating their providers, with annual reviews the most common. When they evaluate their providers, the top five factors they look at are: quality of investment options (cited by 55%), plan administration fees (48%), range of investment options (48%), overall service quality for participants (46%) and plan investment fees (43%).
“Notably, the criterion of plan design features is identified by 37% of plan sponsors this year, up from 30% in 2014, suggesting that plan sponsors may be looking for a greater level of support from their providers in optimizing the design of their plans,” Cogent said.
Asked why they are likely to review or switch providers, the top reason sponsors cited was plan administration fees (41%), followed by quality of investment options (33%), plan investment fees (33%), range of investment options (30%) and overall service quality for participants (30%).
As to plan sponsors’ reasons for dropping or reducing investment managers, the overwhelming cause is underperformance relative to benchmarks, cited by 59%. Other factors include investment team turnover (27%), to seek funds with lower fees (26%), organizational instability (13%), and poor understanding of the sponsor’s goals and objectives (11%).
NEXT: Implications for plan providers
No longer operating on auto pilot, changes within the 401(k) industry are taking the forms of increased incidence of formal plan reviews and intention to switch providers and modify investment lineups, Cogent said. “With many taking counsel from an external consultant or financial adviser, plan sponsors are clearly articulating what they want from a provider, so it is up to firms offering 401(k) plans to follow through with a differentiated offering that is competitively priced, provides high-quality choice in investment options and supports strong fiduciary practices.”
In short, providers cannot afford to be complacent, Cogent said. They need to defend their administration fees and participant service quality, along with the quality and range of their investments, the research firm said.
Cogent’s report is based on two separate surveys of 401(k) plan sponsors, the first conducted in February and March, and the second in March and April. Cogent’s full report can be viewed here.