Plans, providers proactive on fee regulations

Defined contribution executives cut median plan costs to a record low for the 15-month period ended March 31, according to investment consultant NEPC LLC, which has been tracking DC plan costs for seven years.

The reason: long-anticipated fee disclosure regulations that had been published in February but were effective July 1.

“Record keepers knew there would be more transparency, so they acted proactively to reduce fees,” said Ross Bremen, a partner with Cambridge, Mass.-based NEPC.

In its latest survey, NEPC found the median total plan fee was 55 basis points, three basis points lower than the survey for the year ended Dec. 31, 2010, Mr. Bremen said. Total plan costs include investment management, trust and custody, record keeping and communications.

The latest survey covered 15 months, compared to previous annual surveys in which NEPC counted calendar-year results. Mr. Bremen said NEPC chose the 15-month period to incorporate any effects of the Labor Department's publishing of regulations governing fee disclosure to plan sponsors by providers.

The regulations “had a significant impact on record-keeping fees,” Mr. Bremen said. He also said total plan costs are declining in part because more DC plans are choosing more lower-fee share classes.

To illustrate record keepers' willingness to bargain, Mr. Bremen said vendor searches among plans in the survey produced an average 40% savings on record-keeping fees in 2011. “That is a big number,” he said. About 10% of the sponsors in the survey conducted vendor searches last year.

“Four of the five most prevalent record keepers in the survey have changed the way they approach fees,” said Mr. Bremen, declining to identify them. Each cut fees, and most made changes to revenue-sharing policies and other practices, he said.

Measured in dollars, NEPC estimated that the median annual cost for record-keeping, custody and trust services per participant was $92 in the latest survey, down from $103 in the previous survey, Mr. Bremen said. The number was $118 for NEPC's first survey in 2006.

Mr. Bremen noted that the 11% drop in record-keeping revenues between the last two NEPC surveys was greater than the 5% drop in total plan costs.

“This may be explained, in part, by record keepers shifting fees to one part of the business from another, (such as) accepting lower administrative revenues on one side but seeking higher investment management revenues on the other,” Mr. Bremen added. “To this end, plan sponsors should press record keepers for a reduction in total fees and not settle for a mere rebalancing of the different fee categories. We don't want to just be squeezing a balloon.”

The latest survey contains data from 20 record keepers providing services to 99 DC plans with more than $65 billion in assets and more than 975,000 participants. The average plan had $663.8 million in assets, and the median plan size was $293.5 million. Most of the plans are 401(k) plans, and most are NEPC clients.

The survey also showed a continuing decline in the number of DC plans offering stable value options. Over the last four years, the percentage of DC plans offering stable value dropped steadily to 47% from 62%. The rate was 52% in the previous survey.

The plans' use of money market funds has grown steadily during this four-year period to 36% from 23%. The rate in the previous survey was 32%.

The percentage of plans offering both stable value and money market options remained essentially the same during this period, with 17% offering both in the latest survey.

“Stable value is definitely surviving, but many sponsors are suffering from stable value fatigue,” even though many plans “still benefit from the higher yields of stable value,” Mr. Bremen said. “Many of the sponsors' investment committees have grown tired of the conversations about contracts and the perceived challenges of stable value.”

In recent years, these challenges include concerns about wrap capacity — the amount of affordable insurance products that guarantee the book value of the underlying bond investments — as well as higher wrap fees, stricter wrap contracts and more conservative stable value products with shorter bond durations.

Target-date funds have become increasingly popular, comprising an average of 31% of total plan assets in the latest NEPC survey compared to 28% and 22%, respectively, for the previous two surveys. Also popular are brokerage accounts, with 45% of plans offering them vs. 43% and 35%, respectively, for the previous two surveys. However, relatively few participants use the brokerage accounts — about 5% in the latest survey, and 7% in each of the two previous surveys. n