New federal fee-disclosure regulations have enabled defined contribution plan executives to cut costs in multiple ways, ranging from negotiating lower fees for existing investment options to bargaining for less expensive institutional shares as well as collective trusts, consultants say.
The heightened confidence among plan executives to negotiate better terms with record keepers also has led to plans reducing their reliance on complex revenue sharing and adjusting their arrangements to rebate money to participants or receive additional services from record keepers.
“The record-keeping pricing game has changed in several ways” thanks to the regulations, said Ross Bremen, a partner with Cambridge, Mass.-based investment consulting firm NEPC LLC.
“Fee-disclosure regulations have had an influence,” said Lori Lucas, the Chicago-based executive vice president and defined contribution practice leader for Callan Associates Inc. “We started to see this movement by sponsors in anticipation of the rules. The record keepers pretty much saw the writing on the wall and decided to be competitive.”
Consultants say the unusually long run-up to the Labor Department's final approval of regulations contributed to the changes because record keepers knew something would happen — even if they didn't know exactly what or when. The department originally proposed changes to Section 408(b)(2) of the Employee Retirement Income Security Act in December 2007. The final rules were published last February and took effect in July.
Some surveys show sponsors' attitudes and actions changed as fee-disclosure regulations were debated and enacted. For example:
- A soon to be released survey by Aon Hewitt, Lincolnshire, Ill., using data from 2012 found multiple instances of sponsors saying they are likely to take fee-cutting action in 2013 vs. 2012. Among plan executives who hadn't already acted, 52% said they were very likely or somewhat likely to hire a third party to benchmark or analyze fees, compared to 35% in the previous survey. And 30% said they would likely change some or all funds to lower-fee share classes vs. 24% in the previous survey.
- A recent survey by NEPC said that median DC plan costs of 55 basis points for the 15 months ended March 31, were the lowest since the financial consulting firm began its annual survey in 2006. About 10% of plans in the latest survey conducted vendor searches in 2011, producing an average 40% savings on record-keeping fees.
- The annual survey by the Plan Sponsor Council of America, published in October, noted 53.7% of plan executives said they used third-party fee benchmarks vs. 48.7% in PSCA's previous study.