Defined contribution plans increasingly are taking measures to reduce costs by adopting institutional investment funds and flat record-keeping fees, according to a survey from Aon Hewitt.
More than 75% of employers surveyed said they made efforts to reduce fund or plan expenses in the past two years, compared to about 50% in 2007. Sixty-two percent said they switched share classes to lower-cost alternatives and 50% said they swapped out funds for lower-cost options.
Rob Austin, director of retirement research at Aon Hewitt, said the move to institutional funds has been part of “social norming” as more plans go that route.
“It's reaping the benefits without the drawback of costs,” Mr. Austin said about increasing income for participants without additional contributions. According to Aon Hewitt, decreasing fees to 0.75% from 1% per year has the same effect as a participant contributing an additional 0.5%.
More than 90% of employers offered at least one non-mutual fund alternative investment option, up from 59% in 2007. Sixty-one percent of plans with $1 billion or more in assets had more than half of their investment options in non-mutual funds, compared to 21% for plans with less than $1 billion in assets.
One of the largest areas of improvement was plans moving from a revenue-sharing agreement to a flat fee. Now, 26% of plans pay a flat fee, up from 14% in 2011. Meanwhile, plans using fund-based fees have dropped to 59% from 83% in the same time period.
“The part about moving to a fixed fee from a percentage is a big change … and it tends to be a little fairer,” Mr. Austin said.
If a participant with a starting salary of $75,000 is charged $50 per year, as opposed to 0.25% of assets each year, the balance at retirement would increase by $200,000. “It's pretty huge,” Mr. Austin said. “Those are the (plans) doing the right thing.”
Plans also are offering more index funds in areas like midcap equity, international equity and intermediate-term bonds. Further diversifying options, such as emerging markets and short-term bond funds, are also increasing, according to the survey.
Aon Hewitt surveyed executives of more than 400 DC plans with a total of $500 billion in assets from mid-February to mid-June.