DC execs work to cut revenue sharing, survey finds

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Christopher Lyon believes fee equalization could be one way to counter revenue-sharing arrangements.

Defined contribution industry executives are looking for ways to reduce or revise the role of revenue sharing, a new survey by Pensions & Investments and Rocaton Investment Advisors LLC shows.

Sixty-four percent of respondents said they expect revenue-sharing use among DC plans to decline significantly or slightly in the next two years. Only 10% expect revenue-sharing use to increase.

“The industry sees the writing on the wall,” Christopher Lyon, a partner at Norwalk, Conn.-based Rocaton, said in an interview. “Plan sponsors will move away from revenue sharing or make changes.”

The changes, he added, could include equalizing fees charged to participants in different investment options subject to revenue sharing, or rebating or crediting some revenue-sharing fees back to participants. Under revenue sharing, all or most of a record keeper's fees are offset by investment management fees.

Revenue sharing was one of the many topics covered in the survey, conducted online in January. The analysis is based on responses from 450 employees of record keepers, money managers and investment consulting firms. Among the respondents, 48% worked for money management firms that don't do record keeping, 27% worked for consulting firms and 25% worked for record keepers.

Other findings include:

nNearly two-thirds of respondents agree the initial default rate contribution for a newly hired employee should be 6% of pay or higher (the most common rate used today is 3%).

nSome 45% said automatic features, such as auto enrollment and auto escalation, are their top choice among strategies to best improve participant retirement outcomes; 25% picked auto features as second or third.

nIndustry professionals support re-enrollment, with 28% saying its makes sense for all DC plans and 57% saying it makes sense for some plans.

nMost believe less liquid alternative investments will become more popular as components of target-date funds in the next two years; only 21% disagreed.

More attuned

Mr. Lyon said defined contribution plan executives are becoming more attuned to revenue sharing and overall fees thanks to fee-disclosure regulations approved by the Department of Labor in 2012. “Our sense is that the regulations heightened people's interest and attention,” he said. “They perceive it as a fairness issue.”

Some 54% of respondents said it's a “problem” if a DC plan's investment options have different levels of revenue sharing, such as charging higher fees for active options than passive ones. The definition of “problem,” Mr. Lyon said, “is in the eye of the beholder.”

Consultants had the strongest views,” with 70% saying multiple-level revenue sharing is a problem, Mr. Lyon said. “They tend to lead the fee studies and make recommendations on fees.”

One way to address these disparities is through fee leveling, applying fees evenly among all participants. Some participants would be charged more, while others would get rebates or credits to reduce their fee burden.

Among all respondents, 37% believe most record keepers over the next two years will fee leveling to address revenue-sharing problems, while 46% said some will do so. Among the record keeper group, 46% said most of their brethren would employ fee leveling while 35% said some would do so.

When asked if money managers would offer new non-revenue sharing strategies in the next two years, 46% of all respondents said such a move was highly likely and 31% said it was somewhat likely. Once again, record keepers had a stronger response, as 55% said such strategies were highly likely and 28% said these strategies were somewhat likely.

Responses about auto features were “encouraging” and indicated “overwhelming support,” said Jeri Savage, managing director, defined contribution research at Rocaton.

For example, more than 90% predicted auto enrollment will become more commonplace in the next two years, while substantial majorities said initial default contribution rates will be “meaningfully higher” and automatic escalation will become more common during the same period.

"Only a starting point'

Although two-thirds of respondents said the initial default should be 6% or more for a new employee through auto enrollment, Mr. Lyon said this was “only a starting point” for plans because they also need to provide auto escalation to raise participants' savings rates.

To the question of strategies to best improve participant retirement outcomes, re-enrollment was mentioned by 13% as the top choice while 24% said it was a second or third choice.

Education was cited by 11% as the first choice and by 27% as the second or third choice.

Some 57% said DC plans would be likely to conduct re-enrollment in the next two years. The most optimistic group, at 68%, was record keepers.

“We think the concept has momentum,” Mr. Lyon said.

Respondents also predicted DC investment lineups will look different as alternatives play a bigger role as target-date fund components.

Among alternative investments, 29% of respondents predicted hedge funds would be added to target-date funds in the next two years; 38%, hedge funds of funds; 31%, private equity; and 35%, private real estate.

Respondents could choose more than one answer.

“Using the target-date fund vehicle is not surprising to us,” Mr. Lyon said.

“It was interesting to us about how widespread the strategies were.” n

Survey results

This article originally appeared in the March 3, 2014 print issue as, "Execs work to cut revenue sharing, survey finds".