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.
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.
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 participants.
Fee-cutting is due to multiple factors — legislation,
regulation, fear of lawsuits, greater scrutiny for sponsors and consultants,
and competitive actions taken by record keepers, the report said. Mr. Bremen
repeated a warning that he and other DC consultants have made in recent years:
Sponsors should beware of cutting costs too far because such action could
impair services.
The latest NEPC survey contained data from 113 DC plans,
covering 1.4 million participants with aggregate assets of $123 billion. Most
of the plans were 401(k) plans, and most of the respondents were clients or
prospective clients. The latest survey also offered comparisons to the firm's
first survey for the year ended Dec. 31, 2005. The comparisons include:
• Fifty-four percent of plans used automatic enrollment
last year, up from 26%;
• Forty-six percent offered brokerage windows, up from
19%;
• Twenty-three percent offered managed accounts, up from
13%;
• Ninety-five percent used a diversified investment
option as a default, up from 38%; and
• Ninety-six percent offered target-date or lifestyle
funds, up from 74%.
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