The ferocity of fee-fighting by defined contribution plan executives was in full force in 2019 and will continue in 2020, an annual survey of sponsors by Callan LLC revealed Thursday.
"For the fourth year in a row, plan sponsors ranked reviewing plan fees as the most important step they took to improve their plan's fiduciary position," said a report describing the survey results. "Fees will also be the main priority for 2020."
Updating, reviewing and/or implementing investment policy statements ranked second in each of the last four years.
For the 2020 forecast, plan fees were cited as the most important "area of focus" by 38.7% of respondents, followed by quality of providers (35%), investment structure (31.8%), fund/manager due diligence (31.4%) and participant communication (27.3%). Multiple choices were allowed.
The sponsors' most prominent fee initiatives for 2020 are:
- Switching certain funds to lower-fee share classes, action cited as very likely or somewhat likely by 66.7% of respondents.
- Conducting a fee study, mentioned by 55.7% as very likely or somewhat likely.
- Renegotiating investment manager fees, referenced by 50% as very likely or somewhat likely.
- Renegotiating record keeper fees, identified by 44.7% as very likely or somewhat likely.
The sponsors were given 13 choices; multiple answers were allowed.
The latest Callan survey — this is the 13th year — covered 114 DC plans, most of which are 401(k) plans. The number of respondents differs from year to year.
Among the 10 choices for sponsors' focus this year, 19.1% of respondents mentioned cybersecurity as the most important issue. "I would have expected more," Jamie McAllister, a co-author of the survey report and senior vice president and defined contribution consultant, said during a Wednesday news conference.
Fees figured prominently in several other aspects of the Callan survey. When asked what's most important in evaluating and selecting a fund, cost and fees ranked second in 2019 and in 2018. Investment performance placed first in both years among 11 choices presented to sponsors.
When asked what is the most important criteria for selecting or retaining target-date fund series, plan executives placed fees second in 2016, 2017 and 2019, and third in 2018 among 10 choices. Portfolio construction was cited first in 2017 and 2019; performance was cited first in 2016 and 2018.
Ironically, when asked about their 2020 communication efforts, sponsors ranked fees last of seven choices. Financial wellness placed first for the third consecutive year. "While plan sponsors are heavily focused on managing plan fees, they are not as focused on communicating them," the report said.
Callan also found that growth in auto enrollment, a significant plan design feature, had stalled in the past four years, with 69.7% of respondents offering this feature in 2016 and 70.7% of respondents offering it in 2019.
For those who didn't provide auto enrollment, 40.9% said it wasn't necessary, 22.7% said it cost too much and another 22.7% said it wasn't a high priority for the top reasons among nine choices for which multiple answers were allowed.
Growth in auto-escalation practices also has slowed down. Although the rate jumped to 71.7% in 2016 vs. 50.5% in 2015, it has inched up since then, landing at 76.2% in 2019. The top reasons cited by sponsors for eschewing auto escalation were employees wouldn't like it (27.6%) and this feature was not a high priority (22.2%).
The survey also noted a continuing decline of actively managed target-date series compared to target-date series that have a mixture of passive and active investments as well as those with all index funds. In 2019, the all-active group accounted for 23.4% of target-date series, or about half of what it represented inn 2011. For 2019, the mixed group reached 39.4% and the all-index category represented 37.2%.
Noting that the mixed group's percentage rose to 39.4% from 23% in one year, Greg Ungerman, a report co-author, said at the news conference that many actively managed target-date series are adding some index investments. The reason was lower fees in categories such as domestic equity, where there was little difference in performance but a big difference in cost, said Mr. Ungerman, senior vice president and defined contribution practice leader.
He also noted that sponsors continue to move away from their record keepers' proprietary products — to 21.4% of target-date styles in 2019 from more than 50% in 2012. Callan predicts the proprietary target-date series will drop to 15.8% in 2020.
The biggest target-date styles in 2019 were collective trusts (29.6%) not affiliated with the record keeper and mutual funds (29.6%) not affiliated with the record keeper.
These collective trusts will grow to 31.6% in 2020, a reflection, Mr. Ungerman said, of lower expenses than mutual fund target-date series. This mutual fund category is expected to slip to 25.3%. Custom target-date funds' role will increase to 21.1% in 2020 from 17.3% in 2019.