DC plan costs continuing to decline, survey shows

Defined contribution plan executives are flexing their muscles in negotiations with record keepers, continuing to cut plan costs, a survey by investment consultant NEPC LLC, Boston, shows.

Plan officials are chipping away at investment management fees as well as total plan costs, and they have taken more steps to reduce their reliance on revenue sharing, according to NEPC's ninth annual survey, which will be released Oct. 13.

Ross Bremen, an NEPC partner, said two factors are influencing the DC plans' actions: the enactment of Department of Labor regulations in mid-2012 governing fee disclosure from providers to sponsors and years of litigation by participants against sponsors alleging excessive fees and/or breaches of fiduciary duty.

“It's clear to us that fear of lawsuits is driving plan sponsor agendas,” said Mr. Bremen.

DC consultants, including Mr. Bremen, have noted that DC plans began negotiating new fee arrangements several years before the DOL rules took effect in 2012, anticipating a strengthening of fee disclosure requirements. The DOL initially proposed regulations in October 2007.

“There has been be greater attention to costs being paid today than there has been historically,” said Mr. Bremen, whose firm's latest survey shows a steady decline in plan costs in recent years.

The average estimated plan fees — an “all-in” cost for investment management, record keeping, trust and custody services — dropped to 52 basis points for year-end 2013 from 53 basis points in 2012. These all-in fees have declined steadily each year from the 59 basis points for year-end 2009.

Meanwhile, the annual weighted average expense ratio has dropped to 49 basis points in 2013 from 55 basis points in 2009, the survey said. The expense ratio was 52 basis points in 2012.

“As sponsors have looked for ways to reduce plan expenses, they have moved to cheaper share classes when their record-keeping arrangements have allowed them to do so,” Mr. Bremen said.

One challenge to traditional practices has been DC plans' efforts to reduce or eliminate revenue sharing, the practice by which all or most of a record keeper's costs are offset by the fees on a plan's mutual funds and collective trusts, Mr. Bremen said.

Last year, the median average-weighted revenue sharing represented 9% of plan assets among respondents in the NEPC survey, falling each year from 15% in 2009. It was 10% in 2012.

“With so much attention to fees, plan sponsors have tried to lower record-keeping fees,” Mr. Bremen said. “You have seen revenue sharing as a percentage of sponsor assets decline as plans look for fewer funds with revenue sharing.”

Within DC plans, the survey said the median percentage of investment options with some form of revenue sharing was 50% last year vs. 61% in 2012. Mr. Bremen said 14% of plans had no revenue sharing last year vs. 13% in 2012. “The largest plans are most likely to have no revenue sharing,” he said.

Because revenue sharing is complex, Mr. Bremen said many DC plan executives have talked about moving to a per-head record-keeping fee rather than an asset-based record-keeping fee, with the largest plans being the most common practitioners. The survey said 29% of plans have fixed dollar-per-head record-keeping contracts last year, the first time the question was asked. Of that group, 61% had DC assets of more than $1 billion.

The NEPC survey also showed a rising use of reimbursement expense accounts, also known as ERISA expense budget accounts or recapture accounts. Forty percent of plans had these accounts last year, up from 37% in 2012. These accounts were offered by 27% of plans in 2009.

(These accounts hold record-keeping revenue above the amount negotiated by the DC plan and record keeper. The excess can be returned to participants or used for ERISA-approved expenses such as employee communication.)

Mr. Bremen said DC plans' reducing fees and renegotiating revenue-sharing arrangements underscore the answers of a first-time question in the survey. When asked when was the last time sponsors changed or amended agreements with record keepers, 10% of the 113 sponsors acted in 2011, while 15% took action in 2012 and 55% made changes in 2013.

“At a minimum, this shows plan sponsors are paying more attention” to fees and revenue sharing, said Mr. Bremen. However, the survey didn't distinguish between contracts being automatically renewed and those being revised or changed.

Despite DC plans' steadily reducing costs, fee reductions “can't go on forever,” Mr. Bremen said. “Record-keeping fees shouldn't be a race to the bottom.”

Noting recent mergers and acquisitions among record keepers, Mr. Bremen said he expected more industry consolidation. “Record keepers need to make money,” he said. “I would think many record keepers are contemplating their long-term viability in a challenging market.”

The NEPC survey results are based on 24 record keepers reporting on 113 defined contribution plans with aggregate assets of $122 billion. Most of the plans are 401(k) plans and most are NEPC clients.