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Defined Contribution

Fees, lawsuits top issues for sponsors, consultants

PIMCO survey finds 'hypersensitivity' even with reduced plan costs

Stacy Schaus
Stacy Schaus said ‘litigation definitely has the industry’s attention,’ and costs aren’t far behind

Fees and litigation fears dominate the thinking of defined contribution plan executives and their consultants even though plan costs have come down over the years, according to a new survey by Pacific Investment Management Co. LLC, Newport Beach, Calif.

“There's a hypersensitivity on fees and litigation,” said Stacy Schaus, executive vice president and defined contribution practice leader for PIMCO. “Litigation definitely has the industry's attention.”

The PIMCO survey, released April 17, was based on responses from 69 DC consultants serving more than 12,000 clients whose combined assets exceed $4 trillion. The online survey was conducted in December and January.

When consultants were asked which DC services have grown the most over the past year, 75% cited total plan cost/fee studies as the top choice, well ahead of investment default asset allocation management (57%) and investment menu design (48%).

“Fees are important, but consultants are not saying just go cheap,” Ms. Schaus said.

Fees and costs remained at or near the top of respondents' answers, no matter how PIMCO phrased questions about DC strategies and trends.

For example, consultants ranked evaluating investment fees, evaluating how plan costs are paid and examining administrative fees as second, third and fourth, respectively, among clients' top priorities in 2017. Reviewing target-date funds placed first.

Studies show that DC fees have declined over time — a product of litigation, Department of Labor fee transparency rules, competition among providers, and a greater use of collective trusts and passive investments.

For example, an annual survey by NEPC LLC, Boston, reported in September that DC plan investment fees dropped to 42 basis points in 2015, down 8.7% from 2014.

In January, an annual survey by Callan Associates Inc., San Francisco, found that 11.9% of DC executives increased their use of passive investments in defined contribution plan menus while only 2.4% added actively managed investments. The survey noted that 36.6% of target-date funds were actively managed last year vs. more than 50% in 2010.

In the PIMCO survey, fees shared the spotlight with litigation when consultants were asked about key issues affecting the defined contribution industry's future. Sixty-seven percent cited litigation as having a significant impact; 58% mentioned fee pressure.

Litigation weighs on the minds of consultants and their clients, heavily influencing sponsors' actions, according to the PIMCO survey.

Among the factors most likely to affect a client's decision-making, litigation was cited by 25% of consultants as the most important, placing second to meeting participants' retirement goals (29%). In third place, consultants mentioned investment costs (14%).

Ms. Schaus said an emerging issue is target-date funds. As they become more ubiquitous and gather more DC money due to their giant role as a qualified default investment alternative, sponsors and consultants are paying more attention. “That's where the money is,” Ms. Schaus said.

The fact that 77% of consultants said reviewing target-date funds was the top priority for this year signals that investment components and strategies of these options will be getting a closer look, Ms. Schaus said.

“They're looking at the glidepath first,” she said. “There will be more scrutiny on whether target-date funds are meeting retirement goals.”

Target-date funds are the most recommended by consultants as QDIAs — 97% — with the rest divided among balanced funds and managed accounts, the survey report said.

Glidepath structure is the most important factor when evaluating and selecting a default strategy cited by consultants (98% of respondents), followed by fees (89%) and diversification of underlying investments (73%), the PIMCO report said.

This article originally appeared in the April 17, 2017 print issue as, "Fees, lawsuits top issues for sponsors, consultants".