Fee Benchmarking Rises, But Does it Matter?
TPAs and other retirement plan professionals may find it useful to know that the number of plan sponsors calculating and benchmarking fees in the past 12 months has increased — and whether that is having an impact.
A recent survey by Callen says that the number of plan sponsors that calculated their DC plan fees within the past 12 months rose to 83.1% from 78.8% in 2016. But the current figure still is below the highest level recorded, which was 92.9% in 2013. The survey notes that “only 5% have not calculated plan fees within the past three years” (or are unsure), although that seems remarkably high.
A little less than two-thirds (62.7%) of plan sponsors surveyed both calculated and benchmarked plan fees within the last 12 months. More than three quarters of plan sponsors (77.2%) benchmarked the level of plan fees as part of their fee calculation process, down slightly from last year (79.2%). The percentage of plan sponsors that do not know whether plan fee levels are benchmarked (9.6%) was up from 7.5% in 2016.
And while about half (45%) of those who reviewed them kept fees the same following their most recent fee review, nearly as many (40.5%) reduced fees.
Looking ahead, 6 in 10 plan sponsors are either somewhat or very likely to conduct a fee study in 2018 (nearly identical to the percentage in the previous year’s survey), while about half say they will switch to lower fee share classes (51.7%) or renegotiate recordkeeper fees (50.5%).
Renegotiating investment manager fees jumped from the bottom five “somewhat or very likely” activities in 2016 into the top five (39.4%) in 2017. Moreover, recordkeeper search activity is likely to continue in 2018, with 15.9% saying they are very or somewhat likely to conduct a search, although this is down from 2016 (which was a record high at 25.5%).
Only 8.0% of plans with revenue sharing report that all of the funds in the plan provide revenue sharing, a small increase from 2016. The most common is to have between 10% and 25% of funds paying revenue sharing, a change from 2016 when the most common was 26% to 50%.
Still, one in six plan sponsors say they are not sure what percentage of the funds in the plan offer revenue sharing.
Plan sponsors tend to use multiple data sources in benchmarking, although consultant databases (49.4%) and general benchmarking data (46.0%) are the most frequently cited.
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 2017), which augurs caution in drawing conclusions about trends – a point that Callan points out in its analysis.