Two-Thirds of DC Consultants Charge Fixed Dollar Fees

This is down from three-quarters last year, a PIMCO survey found

Sixty-seven percent of defined contribution (DC) consultants charge fixed dollar fees, down from 75% last year, according to PIMCO’s Defined Contribution Consulting Support and Trends Survey. Basis-point arrangements increased from 24% to 32%. The average revenue, as a percentage of total revenue, derived from DC plans is 50%, up from 47% last year.

DC consulting firms tend to offer many similar services—with the top six being investment manager selection and monitoring (100%), investment menu design (99%), total plan cost/fee studies (99%), investment policy development/documentation (97%), governance reviews (96%) and recordkeeping searches (96%).

At the median, the firms are staff with 10 DC-dedicated employees consisting of five consultants, two research analysts, one non-research analyst and two administrative support people. Last year, however, the firms were staffed with 12 people.

Twenty firms have non-U.S. DC-dedicated specialists, including 16 with specialists dedicated to the Canadian market, 10 to the U.K., six to Asia, four to Australia, four to Europe ex-U.K., and three to Latin America. Last year, 24 firms reported non-U.S. DC-dedicated specialists.

Asked which services have grown the most over the past year, the top five are: total plan cost/fee studies (65%), recordkeeping searches (49%), discretionary oversight of investment selection and monitoring (45%) and investment menu design (41%). Ninety-nine percent of firms said they are willing to act as a 3(21) fiduciary, and 52% as a 3(38) fiduciary, both on par with responses in last year’s survey.

Respondents said that 11% of their clients, on average, use their discretionary services, the top five of which are: deciding when to replace managers and conducting manager searches (85%); deciding on the investment default and investment menus (79%); measuring, monitoring and negotiating fees (77%); monitoring recordkeepers (61%); and developing white label or multi-manager portfolios, including a custom glide path for the target-date funds (TDFs) in the qualified default investment alternative (QDIA) (49%). However, the DC consultants expect that by 2020, 20% of their clients will be using their discretionary services.

Last year, respondents said that they expect 12% of their clients to implement outsourced chief investment officer (OCIO) services in the next three years, but this year, that grew to 24%. Asked why sponsors are increasingly interested in this, the consultants said it is to mitigate fiduciary risk (90%) and because they do not have adequate internal investment expertise (85%).

The respondents also expect an additional 16% of their clients will use custom TDF services in the next three years and that 26% will implement multi-manager/white label strategies in that timeframe.

Asked what types of communication/education services they are providing to their clients, 38% said written materials explaining the benefits of participating in the plan, 34% said group participant meetings, 25% said one-on-one meetings, and 19% said web or video participant meetings.

Asked what they think their clients or prospects value in hiring or retaining their services, 95% said it is personal relationships, 94% said investment research, 93% said it is the experience of their staff, 93% said thought leadership, 93% said shared philosophies, and 90% said pricing competitiveness.

Ninety-six percent recommend auto enrollment, and 93% auto escalation. Additionally, 42% recommend auto catch-up. At the median, respondents recommend a starting deferral rate of 6%, and 41% recommend escalations up to a 10% cap.

Fifty-nine percent do not recommend a brokerage window. At the median, the income replacement goal they recommend is 80%. However, if participants expect to receive Social Security, the average income replacement goal is 65%.

At least two-thirds recommend a client consider re-enrollment upon a significant investment menu redesign (89%), a plan merger (80%), a new QDIA being put in place (77%), or the recordkeeper being changed (67%).

At the median, the consultants said that 10% of their clients had conducted a re-enrollment, and they expect that in the next three years, an additional 10% will do so.

What drives sponsor decisions

Asked why their sponsor clients had decided on changes to their retirement plan, 52% of the consultants said it was to meet participant retirement goals, followed by managing litigation risk (40%).

For plans with more than $1 billion in assets, 29% of the consultants recommend that the employers pay the fees out of pocket, and 28%, a flat dollar fee per participant. However, among plans of all sizes, 83% of the consultants said it is not likely for the employer to cover the investment costs. For non-investment costs, 86% of the consultants said it is at least somewhat likely the employer will pay out of pocket to cover costs.

Eighty-seven percent of the consultants recommend a TDF as the QDIA. When selecting a TDF, the top five factors the consultants said they consider are: fees (83%), glide path structure (82%), the probability of meeting participants’ retirement income objectives (65%), the quality of the underlying funds (56%) and market risk mitigation (44%). For plans with more than $1 billion in assets, 53% of consultants recommend custom TDFs.

On average, 48% of consultants’ clients either actively seek to retain retired participants’ assets (19%) or prefer retaining those assets but do not actively encourage retirees to do so (29%).

PIMCO’s full report can be downloaded here.