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Investment Management Highest DB Plan Expense

The cost of investment management is the top expense for defined benefit plan sponsors, a recent study found.

Penbridge Associates, an advisory firm that focuses on the U.S. DB risk transfer market, conducted the study. It looked at the costs associated with maintaining a U.S. corporate DB plan, and includes findings about expense ratios, source of payments and in-house management resources, including:

Expense ratios — Most plan’s total expense ratios are between 0.50% and 1.50%. The average expense ratio for all plans was 0.97%. But on a weighted basis, the average expense ratio was 0.73%. Pembroke argues that this indicates that larger DB plans operate more efficiently.

Largest plan expenses — Investment management was the largest plan expense. PBGC premiums and plan administration were the second and third highest expenses.

Source of payments — Plan assets and direct payments from plan sponsors were the significant payment sources for each plan expense category. The study also found that in every expense category some plan sponsors pay expenses entirely from plan assets; however, there also are some plan sponsors that do not use any plan assets for that purpose.

In-house pension management resources — The average full-time equivalent (FTE) headcount devoted to U.S. DB plan management for all plan sponsors that participated in the survey was 2.5. The FTE decreased with the size of the plan.

Pembroke said that complicating factors in collecting and analyzing data included internal access to information, number of vendors, varying fee arrangements, potential lack of transparency on all fees, whether fees are paid inside or outside the plan and the difficulty of quantifying internal resource time and cost.

Pembroke also reported that participants found taking part in the study enhanced their benchmarking efforts and helped them to identify potential cost saving and improve overall plan governance.