Survey Finds Fees a Fiduciary Focus
A new survey finds that plan sponsors, by a wide margin, cited reviewing plan fees as the most important step they took in improving their fiduciary position in 2017, and 60% of survey respondents said they are somewhat or very likely to conduct a fee survey in 2018.
While this ranked significantly higher than any other activity undertaken, it was also top-ranked in last year’s survey, and in 2014, slipping to No. 2 in 2015. Updating or reviewing the investment policy statement came in second, while conducting formal fiduciary training, changing the investment menu, and conducting a plan audit rounded out the top five.
The survey – Callan has been conducting these since 2007 – incorporates responses from 152 DC plan sponsors, including both Callan clients and other organizations. The results skew toward larger plans; more than 60% of the respondents have more than $1 billion in plan assets (twice as many as a year ago), and more than 90% have in excess of $100 million in assets. There was also a significant increase in the number of Section 457 plans in the survey (from 7.9% in 2016 to 21.7% in the current survey), which augurs caution in drawing conclusions about trends – a point that Callan points out in its analysis.
Plan sponsors reported a decrease in the use of revenue sharing to pay fees, with the most common fee payment approach reported as explicit per participant fees (54.7%). Only 8.0% of plans with revenue sharing report that all of the funds in the plan provide revenue sharing, with the most common is to have between 10% and 25% of funds paying revenue sharing. Still, one in six plan sponsors say they are not sure what percentage of the funds in the plan offer revenue sharing.
When asked whether their recordkeeper will provide guidance/education or advice on various participant transactions, most (generally in the 70% range) noted that transactions would be educational in nature, according to the report. However, more than a third (35.6%) said their recordkeeper would provide advice on investments, and more than a quarter said they would provide advice on distributions/rollovers.
According to the report, a large proportion of respondents indicated that they do not know what they require (29.4%) of their recordkeeper to monitor any advice given, nor is there a clear majority practice to monitor these services. Callan notes that at the time this survey was conducted, the most prevalent monitoring requirements were:
- reviewing the advice software (46.1%);
- receiving reports on advice interactions (40.2%); and
- reviewing samples of written communications (40.2%).
However, going forward, Callan notes that monitoring practices are even murkier: 42.7% do not know what they will require in 2018, and another 12.2% expect to have no monitoring in place.
More than half of the plan sponsors have a written fee payment policy in place, either as part of their investment policy statement (24.7%) or as a separate document (30.1%), the highest rate recorded in Callan’s survey history (though perhaps impacted by the massive increase in mega and 457 plans).
More than 8 in 10 plan sponsors say they engage an investment consultant, though a large proportion were not sure whether their consultant had discretion over the plan (a 3(38) advisor) or not (a 3(21) advisor). Of those that did know, the majority reported using the latter.
In measuring the success of the plan, participation rate/plan usage was once again rated the highest, and by a fair margin, followed by investment performance. Contributions/savings rate (No. 2 last year), cost effectiveness and retirement income adequacy tied for third place. However, Callan notes that retirement readiness is plan sponsors’ primary area of focus over the next 12 months (albeit narrowly beating out “participant communication,” though the latter seemed to be a particular focus for government plans).
Cybersecurity rose from a near the back of the pack concern in last year’s survey to a middle rating in 2017.
Not surprisingly, in 2017, 85.2% of plans use a target date fund as their default for non-participant directed monies, generally in line with prior years. However, the use of managed accounts doubled – from 2.5% in 2016 to 5.2% in this year’s survey.
Callan notes that, continuing a long-observed trend, the plans offering their recordkeeper’s target date option continued to drop – from more than 50% in 2012 to 23% in 2017 (note: the shift in respondent plan sizes might be a factor). There is more uncertainty over what approaches will be used going forward, as evidenced by the 6.3% that do not know which target date fund approach they will use in 2018.
Moreover, Callan notes that the prevalence of custom solutions has “leveled off,” and in recent years has hovered in the low 20% range. Those offering those options cited a better cost structure as well as access to best-in-class underlying funds as the top motivations.
The majority of plan sponsors (55.2%) took some sort of action with regard to their TDFs in 2017. Of those taking action, evaluating glide path suitability maintained its place as the most prevalent course of action (51.7%). Changing the share class of the TDF (22.4%) and moving to a collective trust (8.6%) rounded out the top three.
Consistent with previous years, the top three reasons for selecting or retaining TDFs in 2017 were portfolio construction, fees and performance. Name recognition, whether they were proprietary to the recordkeeper and the use of tactical asset allocation remained the lowest ranked factors.
The survey also found that the use of auto features continued to be widespread. Nearly three quarters of non-government plans used auto enrollment; four out of five plans with auto enrollment also offered automatic contribution escalation; and plan sponsors reported the highest average auto enroll default contribution rate in the survey’s history (4.6%). Key reasons for not implementing automatic enrollment for non-government plans include:
- not being perceived as necessary; and
- not being a priority.
Not being permitted to offer automatic enrollment (e.g., because of state wage garnishment laws) was the dominant reason for government plans (61.9%).
After rising sharply from 2015 to 2016, the prevalence of automatic contribution escalation among non-government plans has remained at about 7 in 10 for the past two years, according to Callan. However, the number of plans with automatic contribution escalation that use an opt-out approach increased compared to previous years (70.8% this year versus 59.5% in 2016. However, Callan notes that only 5% of non-government plans without automatic contribution escalation are very likely to adopt this feature in 2018. The top reason for not offering? It’s not a high priority. Government plans cited fiduciary concerns as the top reason for not offering this feature.