Callan: Fund Fees Dominate DC Sponsors` Focus but Many Lack Knowledge in How Plan Fees Work
Callan: Fund Fees Dominate DC Sponsors’ Focus but Many Lack Knowledge in How Plan Fees Work
Callan’s 2012 Defined Contribution Trends Survey: Where Have We Come From and What Lies Ahead, reveals that fund sponsors are overwhelmingly focused on ensuring their plan fees are reasonable and well documented—steps that could improve the fiduciary positioning of their defined contribution (DC) plan. However, survey results indicate that plan sponsors are not fully knowledgeable on other fee issues:
- Approximately 13% do not know what types of administrative fees are applied to their company stock fund.
- One in five (19.4%) that have funds with revenue sharing do not know what proportion of their funds pay revenue sharing.
- 37.5% that credit excess revenue sharing back to plan participants do not know how this happens.
- 16.1% are uncertain if their plan offers an ERISA (expense reimbursement) account.
“It’s clear that DC plan sponsors appreciate the importance of understanding plan fees, but our 2012 survey results indicate that some have quite a way to go to truly comprehend how plan fees work,” says Lori Lucas, DC practice leader at Callan Associates. “The number of sponsors that are unclear about the status of their plan’s fees is remarkable—especially in light of the DOL’s new fee regulations.”
Although the U.S. Department of Labor’s 408(b)2 fee disclosure regulations—governing disclosure by vendors to plan sponsors—are supposed to take effect on April 1, 2012, Callan found that sponsors were not tremendously concerned about complying with the new regulation. Their leading compliance concern was the “lack of clarity on how to comply,” but coming in a strong second, was “no concerns” about compliance.
“It’s natural that many plan sponsors would say there is lack of clarity on how to comply with the service provider fee regulation, as the final regulation still hasn’t been published; however, it was somewhat surprising to find that ‘no concerns’ ranked so highly,” said Lucas. “Fund sponsors seem very confident that recordkeepers will do what is necessary to comply with the 408(b)2 fee regulation. But, it’s important to remember that the buck stops with plan sponsors when it comes to compliance.”
Another interesting trend is the growing use of Roth designated accounts. A majority, 53.8% of DC plans now offer Roth designated accounts to participants—up from 49.3% in 2010. In-plan Roth conversions are also popular. Fifty-five percent of plan sponsors that offer a Roth designated account option also offer in-plan Roth conversions. In contrast, growth in auto-enrollment and auto-escalation features stagnated at around 50% and 35% respectively.
“While adding automatic enrollment or automatic contribution escalation may increase the cost of a DC plan, it is generally inexpensive to add a Roth feature—this may account for the continued growth in popularity of Roth,” added Lucas. “In a challenging economy, Roth can be a cost effective way of improving the appeal of the DC plan.”
For 2012, the second most popular area of focus is on investment structure. As in prior years, a majority, 58.5% of plan sponsors conducted an investment structure evaluation in the past year—suggesting that the average DC plan’s investment structure is reviewed on a fairly regular basis. And, according to 52.7% of respondents, the most common reason for conducting an evaluation is to identify gaps and overlaps in fund lineup; diversification follows at 45.9%.
In addition to their focus on fees and investment structure, the third most important area investors are looking at closely is fund and manager due diligence:
- One in three (31.5%) of plan sponsors replaced a fund or manager last year due to performance. Most affected were large cap domestic equity funds.
- TIPS/real return was the most added fund type in 2011, but TIPS were added at three times the rate of real return funds.
- Plan sponsors that changed their active/passive mix of funds, increased their use of passive funds by 44.8%—far more than active funds in 2011 at 6.9%.
Lucas observed that increased focus on passive funds is likely tied to heightened attention to fees. “Use of index funds in DC plans is another way that plan sponsors can manage high fees. This is especially the case in asset classes where it is difficult for fund managers to add value, such as large cap core.”
Callan’s 2012 DC Trends Survey was conducted in the fall of 2011 and includes responses from nearly 100 U.S. based companies with more than $85 billion in assets.
About Callan Associates
Founded in 1973, Callan Associates is one of the largest independently-owned investment consulting firms in the country. Headquartered in San Francisco, Calif., the firm provides research, education, decision support and advice to a broad array of institutional investors through four distinct lines of business: Fund Sponsor Consulting, Independent Adviser Group, Institutional Consulting Group, and the Trust Advisory Group. Callan employs more than 155 people and maintains four regional offices located in Denver, Chicago, Atlanta and Florham Park, NJ. For more information, visit www.callan.com.
Nancy Malinowski, 415-274-3011