Recordkeeping fees for the majority of workplace retirement plans are still calculated using pricing models based on assets within the plan, according to NEPC. However, the setting of recordkeeping fees based on a fixed-dollar amount per participant—which NEPC says is widely acknowledged as the most transparent and fair approach—appears to be gaining traction.
The flat per-participant fee approach for recordkeeping appears to be especially popular among larger plans, NEPC says, notably among those with $1 billion or more in assets. The survey results underscore the main challenges facing plan sponsors—they have to balance the quality of service providers with efforts to cut costs and improve transparency. Indeed, NEPC’s survey finds the largest costs in a defined contribution (DC) plan are investment management fees, followed by recordkeeping payments.
Looking widely at recordkeeping payments, NEPC says there are four primary approaches used by U.S. employers. These include bundled recordkeeping, in which all recordkeeping fees are covered by some portion of the funds’ expense ratios; fixed-dollar per head recordkeeping, in which fees are calculated using a set fixed-dollar amount for each participant, to be paid by participants directly or through the funds’ expense ratios; and fixed-basis point recordkeeping, in which fees are calculated as an explicit percent of the volume of assets in the plan. The fourth approach, also common, is to use some combination of dollar per head and basis point approaches.
Currently 64% of plans have contracted recordkeeping fees in a bundled or fixed-basis point structure, and 85% have some type of revenue sharing programmed into their fee structure. This leaves 29% of plans with fixed-dollar per head recordkeeping arrangements. Of these, NEPC says, 61% have $1 billion or more in plan assets. Of the 29% with fixed-dollar per head recordkeeping costs, about three in 10 have no revenue sharing provisions.
NEPC says there is a trend in the results of smaller plans being more likely to pursue a bundled approach, while larger plans typically opt for a fixed-dollar per head approach. NEPC suggests this is because larger plans, by virtue of their size, tend to have greater resources at their disposal and can benefit from economies of scale. As a result they can be depended on to be ahead of the curve in setting best practices for the rest of the industry, NEPC adds.
Additional findings from the Defined Contribution Plan & Fee Survey show that 40% of plans now have plan expense reimbursement accounts (PERAs). As NEPC explains, these accounts allow plan sponsors to capture dollars in excess of predetermined recordkeeping fees and use them to offset other plan expenses. For instance, under the fixed-dollar per head fee structure, money left over from revenue sharing arrangements after paying recordkeeping fees could be used by the employer to pay for other plan services, such as communications. NEPC explains that, in a fixed-dollar per head fee structure, recordkeeping fees are usually capped and do not rise as assets increase; this allows PERA balances to grow. This does not hold for bundled fee arrangements, NEPC says, in which fees typically rise in line with assets in the plan.
In a sign of the times, NEPC says more recordkeeping companies with traditional fee structures are offering per head fees alongside plan reimbursement accounts to keep up with changing demand. The data also shows that retirement investment accounts with fixed-dollar per head fee models have the most plans with no revenue sharing. This enhances their transparency, NEPC says.
Overall for 2014, the estimated median plan fee for employers stood at 0.52%, or 52 cents for every $100 in fund assets. This is down slightly from the 2013 findings, which estimated median plan fees at 0.53%. As NEPC explains, plan fees are a plan’s all-in costs, including fees related to investment management, recordkeeping, and trust/custody services. These fees have continued to decline steadily in recent years amid regulatory changes and increased litigation, NEPC says.
Another important fee benchmark, the weighted average of plans’ investment expense ratios, fell to 0.49% this year, compared with 0.52% in 2013 and 0.57% in 2006. NEPC explains that operating expenses are paid out of a fund’s assets and lower the return to a fund’s investors. The ratio is calculated annually by dividing a fund’s operating expenses by the average dollar value of assets under management.
The median recordkeeping fee was $70 for each plan participant in 2014, compared with $80 a year earlier. NEPC says these fees have fallen despite the fact that the majority are asset-based and during the same period the S&P 500 Index gained 32%. The median recordkeeping fee is down substantially from the $118 per participant average in 2006.
The survey findings point to declining rates of revenue sharing, NEPC says. For instance, this year weighted average revenue sharing arrangements stood at nine basis points, compared with 10 basis points in 2013. On average, about 50% of plan investment options have some form of revenue sharing involved, down from 61% in 2013, according to NEPC.
The survey also measured the number of plans where there is no form of revenue sharing present for any of the fund options, NEPC explains. This year, 14% of plans fell into the category, compared with 13% in 2013. Not surprisingly, it was the larger plans which tended to have no form of revenue sharing. Indeed, most plans with more than $2.5 billion in assets had no funds with revenue sharing.