Defined contribution investment fees fell to 42 basis points last year, an 8.7% decline from 2014, according to an annual survey by consultant NEPC LLC, Boston.
“There's no question that in the current environment, sponsors are looking to reduce fees whenever possible,” Ross Bremen, an NEPC partner, said in an interview. That environment includes sponsors’ efforts to negotiate better fee deals by moving to lower-cost asset classes and acting to reduce litigation risk, Mr. Bremen said.
“Sponsors have been focusing on fees for a decade,” he said. “Litigation has put a spotlight on fees.”
Fifty percent of DC plans made changes in one or more investment options for lower-cost share classes in 2014, while 29% said they did so in 2015, Mr. Bremen said. A report describing survey results was published Sept. 21.
When sponsors were asked to name the most important item to address this year, fees placed first among 11 categories, said the survey report.
When asked about the greatest challenges regarding fees, executives said the most important was “ensuring that the current record-keeping model was the most appropriate,” the report said. The second-biggest challenge was “measuring the current level of fees.”
Mr. Bremen added that 82% of DC plan executive said they have renegotiated their record-keeping fees since 2013.
Mr. Bremen warned, as he has done after publication of previous NEPC surveys, that sponsors must balance cutting fees with providing adequate services for participants. “We don't think there should be a race to the bottom,” he said. “The industry needs innovation and high service levels. Otherwise, participants will suffer.”
The NEPC report said 51% of DC plans used a fixed-dollar formula — calculated as a fixed dollar amount per participant — for record-keeping fees in 2015, up from 47% in 2014.
Bundled fee arrangements — in which a participant's cost could depend on the size of his or her account and the types of investments — accounted for 30% last year, down from 32%.
A fixed-basis-point strategy — charging record-keeping fees as a percentage of plan assets — dropped to 13% from 17%. Other arrangements rose to 6% from 4%.
The survey found little change in DC plans’ use of stable value funds and money market funds, even though new money market regulations from the Securities and Exchange Commission will take effect in October. Last year, 47% used stable value as a capital preservation option, 38% used money market funds and 15% used both. In 2014, half of the DC plans used stable value, 38% used money market funds and 12% used both.
“This isn’t a surprise to us,” Mr. Bremen said. “A majority of sponsors who had prime money market funds changed to government money market funds.”
The survey also found that self-directed brokerage accounts were offered by 49% of plans last year, up from 45% in 2014 and 25% in 2007.
“They are pretty widely accepted in the marketplace,” said Mr. Bremen, noting some plans offer these accounts to mollify participants after reducing the number of core investments. Among plans offering brokerage accounts, the median utilization rate was 1.2% last year and 1.4% in 2014.
Among the survey’s other findings:
•Target-date funds remain overwhelmingly popular. Ninety-four percent of plans offer them; of that group, 88% use them as qualified default investment alternatives. Ten percent of plans use custom target-date funds;
•Twenty-five percent of plans offered managed accounts last year, basically unchanged from 2014;
•The median number of investment choices was 22 last year, unchanged since 2012.
The NEPC report is based on data from 19 record keepers with 117 DC plan clients as well as a separate survey of 132 DC plan executives. Most of the information is from 401(k) plans, and most of the responses are from NEPC clients.
