The most dramatic change for defined contribution plans' record-keeping contracts last year was a sharp rise in fixed-dollar contracts, according to a new survey by investment consultant NEPC LLC, Boston.
At the same time, the NEPC survey showed that DC plans continue whittling away at plan costs. The estimated median record-keeping fee for 2014 was $64 per participant down from $70 in 2013. The average annual weighted average expense ratio last year was 46 basis points, down from 49 basis points in 2013.
The NEPC survey said 47% of plans last year had record-keeping contracts in which participants were assessed a fixed-dollar amount per head vs. 29% in the previous year — an increase of 62%.
The move to fixed-dollar fees from bundled fees means “greater transparency and greater fairness” for participants, said Ross Bremen, an NEPC partner, in an interview. “Sponsors are very focused on fees.”
Under a fixed-dollar system, all participants pay the same. Fees can be charged to a participant directly or covered by a portion of the investment options' expense ratios. In a bundled arrangement, a participant's cost could depend on the size of his or her account and the types of investments, Mr. Bremen said.
More plans are moving away from the bundled contract — 32% of DC plans used them in 2014 vs. 46% in 2013. In bundled contracts, record-keeping fees are covered by a portion of the expense ratio of investment options in the plan. However, “a specific fee level is not contracted,” said an NEPC report on the survey results.
In addition, the NEPC survey report said 17% of plans had a fixed-basis-point contract last year vs. 18% for the previous year. This contract calculates record-keeping fees as an “explicit fixed-basis-point of the volume of assets in the plan,” the report said. Fees can be charged via accrual or a portion of the investment options' expense ratios.
The report also said 4% of plans use an “other” arrangement, compared with 7% for 2013. NEPC defined “other” as a contract with “some combination” of dollar-per-head and basis-point terms.
Mr. Bremen remarked that the shift to fixed-dollar contracts is becoming more popular with DC plans that have less than $1 billion in assets. In the past, the fixed-dollar approach had most often been used by the largest plans.
Last year, “we saw a lot of fixed-dollar arrangements for midsized plans,” said Mr. Bremen. Fifty-two percent of plans with fixed-dollar arrangements had assets of more than $1 billion vs. 48% with less than $1 billion in assets, said the NEPC survey report.
Another significant NEPC finding was the rise of plan expense reimbursement accounts, also known as recapture accounts or ERISA expense budget accounts. Fifty-eight percent of plans offered this service last year vs. 40% in 2013, the NEPC survey report said.
These accounts are used by plans that have revenue-sharing arrangements — a practice by which all or most of a record keeper's cost is offset by fees on certain investment options in the plan.
The accounts contain record-keeping revenue that exceeds the amount negotiated between the plan and the record keeper. The money can be returned to participants or used to support ERISA-approved expenses such as education or communication materials for particiants.
“Years ago, it was unusual for plans to have these accounts,” Mr. Bremen said. “Today, it's common.”