Record-keeping revenue for defined contribution plans took a major hit during 2008, plummeting about 30%, according to a survey by NEPC LLC.
The survey, based on interviews with executives for 80 DC plans serving a total of 1 million participants, found the median per-participant administration fee was $78 during 2008, down 30% from $112 in 2007, said Ross Bremen, a partner at the Cambridge, Mass.-based investment consultant.
In an interview, Mr. Bremen attributed the dramatic decline to the assessment of many record-keeping fees as a percentage of assets in revenue-sharing arrangements.
He said that among the DC plans NEPC surveyed, the median weighted average revenue share for plans with fewer than 1,000 participants was 20 basis points, while the median weighted average revenue share for plans with more than 15,000 participants was nine basis points. For 2007, the median weighted average revenue share for plans with fewer than 1,000 participants was 22 basis points, while the median average weighted revenue share for plans with more than 15,000 participants was 11 basis points, Mr. Bremen said.
Mr. Bremen said that in some ways, the dramatic decline in record keeping revenue “is not entirely surprising. The market fell 37% in 2008. When revenues are a percent of assets and the market falls 37%, it follows that revenues are going to drop accordingly.”
While NEPC consultants don't yet know of record keepers seeking to raise their fees in response to the decline in revenues, he said they had heard that some have cut back personnel.
Mr. Bremen also said the S&P 500 had rebounded by 17% through the end of October year to date, and that could ease some financial pressure on record keepers.
But time will tell what impact the revenue loss will have on record keepers, Mr. Bremen said.
“The interesting question going forward will be to see if service delivery models change,” he said.
Executives at Fidelity Investments, Boston — the largest record-keeper in Pensions & Investments' directory of defined contribution plan service providers, with $635.6 billion as of March 31 — had no comment on the study's findings, said Jenny Engle, a spokeswoman.
Similarly, executives at Hewitt Associates LLC, with $192.2 billion in record-keeping assets as of March 31; Vanguard Group, $187.5 billion; and T. Rowe Price Associates Inc., $75.7 billion, also declined comment.
The revenue loss had spurred some record keepers to downsize and crack down on discretionary spending, said Robyn Credico, national director of defined contribution consulting at Watson Wyatt Worldwide, Arlington, Va.
Ms. Credico said record keepers also are repricing existing business as contracts come due, with some for the first time including minimum guaranteed fees for record keeping.
“Vendors are being more careful about pricing of new business and the services they are offering in those solutions,” Ms. Credico said.
But Lori Lucas, executive vice president and DC practice leader at Callan Associates Inc., San Francisco, said that “very few” record keepers who are currently relying on asset-based fees appear to be changing their business models.
“That has been a very profitable model for them historically,” Ms. Lucas said. “They're clearly anticipating growth in assets.”