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Defined Contribution

Ex-employees’ retirement assets help plan sponsors keep a lid on fees – survey

In a bid to maintain low 401(k) costs, many plan sponsors are looking to retain the assets of terminated and retired employees, Callan executives said at a briefing on the firm's 12th annual defined contribution trends survey.

"Everybody benefits from larger scale," said Greg Ungerman, leader of Callan's defined contribution practice, explaining that scale drives down fees.

Mr. Ungerman noted 401(k) plans with a high percentage of non-active participants risk losing value if they fail to retain the assets of terminated and retired employees. If the plans were to lose their assets, it would mean a "totally different fee arrangement with not only the record keeper but the investment offerings within the plan," he said.

Almost 3 in 5 plan sponsors (58.1%) have a policy for retaining the assets of non-active participants, up from 43.5% in 2015, according to Callan's research. Among those that had a policy, 70% sought to retain assets in 2018.

"This is an area that there's going to be a lot more discussion on in the coming years," Mr. Ungerman said.

Other key findings from the survey revolved around plan fees, which employers ranked as the highest area of focus for next 12 months. More than 3 in 4 plan sponsors (77.1%) calculated all-in fees for their DC plans in 2018, down from a high of 92.9% in 2013. When calculating fees, more than half (57.6%) evaluated indirect revenue, which executives described as revenue being passed from managed account providers to record keepers or revenue from IRA rollovers, brokerage windows or float generated in the plans.

More than 4 in 5 plan sponsors (83.3%) benchmarked the level of plan fees as part of their fee calculation process, with consultants and advisers conducting the benchmarking in the majority of cases.

"The vast majority of plan sponsors are calculating and benchmarking, which we think is favorable," said Jamie McAllister, defined contribution consultant in Callan's fund sponsor consulting group in Chicago.

Over half of plan sponsors kept fees the same following their most recent plan review, while 29.3% reduced fees. After reducing fees, the next most common activity resulting from a fee assessment in 2018 was changing the way fees were paid. More than 1 in 10 (14.7%) changed from revenue-sharing arrangements to an explicit participant fee, according to the survey.

Callan conducted the survey in the fall of 2018. It canvassed 106 plan sponsors, including both Callan clients and other organizations.