The pressure on vendors and plan sponsors to reduce defined contribution plan fees remains steady, resulting from recent and expected regulations, fear of lawsuits and old-fashioned bargaining, according to a new analysis by the investment consulting firm NEPC LLC.
“When sponsors do a vendor search, the sponsor always gets lower fees and/or better services,” said Ross Bremen, a partner in the Cambridge, Mass.-based firm, describing some findings of his firm's latest annual survey of sponsors' strategies and practices. The survey was based on a questionnaire sent to 19 record keepers that provide services for 92 sponsors of plans with a combined total of more than 1 million participants.
“As a best practice, we recommend plan sponsors do a vendor search every five to seven years,” he said.
Mr. Bremen said expense ratios have been drifting lower over the six years that NEPC has conducted its survey. The estimated annual costs for record-keeping, trust and custody services also have been declining.
The 2011 survey, which analyzes 2010 data, showed the weighted-average expense ratio was, in aggregate, 0.53%, the same as in the 2009 survey and slightly lower than the 2010 survey result of 0.55%.
The estimated average cost for record-keeping, custody and trust services was $103 per participant in the 2011 survey, the same as in the year-earlier survey.
Some 40% of respondents indicated their plans' record-keeping fees decreased in the last year. “That's pretty remarkable,” Mr. Bremen said.
Mr. Bremen said sponsors are getting lower fees because of greater transparency thanks, in part, to changes in the Department of Labor's Form 5500, which took effect last year. The changes “require more specific line items in a more explicit way” and a “more detailed accounting of plan expenses,” he said.
He said sponsors are taking actions in anticipation of two major pending fee-disclosure regulations from the Department of Labor. One governs communication between participants and sponsors, which was published in October 2010 and affects plans whose years begin on or after Nov. 1, 2011. The other affects communications between providers and sponsors, which is due to take effect Jan. 1, 2012, even though a final rule hasn't been published yet.
“Many have tried to suggest that despite the changes it has been business as usual in the marketplace; the data suggest otherwise,” Mr. Bremen said. “Fee lawsuits and regulatory changes are having a considerable impact on record-keeping revenues. We have seen investment managers rolling out cheaper share classes and record keepers proactively approaching plan sponsors with ways to lower fees.”
The NEPC survey makes clear that size matters when assessing costs and expense ratios. For example, in the latest survey, the median weighted average expense ratio for plans with more than 15,000 participants was 0.37%, vs. 0.68% for plans with fewer than 1,000 participants.
Also, the largest plans had a median administration cost — record keeping, trust and custody — of $66 per participant, vs. $186 for the smallest plans.
A big reason for the higher costs among small plans was the fact that “smaller plans are more dependent on revenue sharing,” said Mr. Bremen, referring to the practice by which most or all of a record keeper's costs are offset by a plan's investments.
“Reliance on revenue sharing has been the major practice for many years, and larger plans are more likely to be the first to consider alternatives,” he said. Mr. Bremen added that midsize and larger plans are considering flat, per-participant record-keeping fees or flat basis-point fee arrangements.
Sponsors are cutting expenses by a greater use of institutional share classes and, when possible, using collective trusts and separate accounts. “The largest sponsors have the most power” in reducing fees, Mr. Bremen said.
The latest NEPC survey found 53% of plans offered automatic enrollment, up two percentage points from the previous survey but more than double the 26% during the first NEPC survey in 2006.
“The increase is dramatic,” Mr. Bremen said. “But auto enrollment and auto increase can require increased company contributions, so we are not at a point where all sponsors feel they can offer them.”
Other comparisons between the 2011 and 2010 surveys showed:
• some 44% of plans offer self-directed brokerage windows, up from 35%;
• the average participation rate was 78%, up from 74%;
• the median number of investment options remained the same at 20; and
• the average percentage of assets in target-date funds rose to 28% from 22%.
Most of the sponsors surveyed are NEPC clients. The average plan has assets of $853 million and 11,069 participants. The median plan had $335 million in assets and 4,716 participants.