401(k) plan sponsors laser-focused on fees

But many aren't calculating 'indirect revenue'

Jan 18, 2019 @ 2:21 pm

By Greg Iacurci

Fees charged in defined-contribution plans rank as plan sponsors' top area of focus in 2019, according to a new report, as employers continue to worry that high fees for functions like administration and investment management could expose them to legal liability.

Plan fees ranked ahead of the participant communication and financial wellness categories, which respectively ranked as plan sponsors' No. 2 and No. 3 focal areas, according to consulting firm Callan's annual Defined Contribution Trends survey.

Plan fees have steadily gained importance in plan sponsors' minds — just four years ago, the category ranked No. 4 in importance among plan sponsors. Retirement readiness, a measure of how prepared workers are for retirement, had the top spot last year but fell to the fifth spot this year.

Lawsuits filed against employers for allegedly excessive 401(k) fees have taken the industry by storm since they began appearing en masse in the mid-2000s, leading to broader cost-consciousness and cost-cutting among both employers and their retirement-plan advisers. The lawsuits have since branched out into other corners of the retirement market, such as 403(b) plans.

"I think we'll continue to see fee pressure across the industry," said Jamie McAllister, a consultant at Callan. "The lawsuits definitely play into it."

Plan sponsors' top-ranked fee initiatives for 2019 are all aimed at reducing fees, which respectively are: switching to lower-fee share classes, conducting a fee study, and switching certain investment funds to collective investment trust funds or separately managed accounts (which often come with lower expenses than mutual funds in retirement plans).

Fees were an important consideration for plan sponsors last year, too. In 2018, plan sponsors' said reviewing plan fees was the most important action taken to improve their fiduciary position — for the third year in a row, according to Callan.

Use of CITs has surged to a high of 75% of DC plans, according to the consultancy, up from 65% last year and 44% in 2011.

However, one surprising point, according to Ms. McAllister, was "indirect revenue," the revenue sharing between entities that may pass from a managed-account provider to the plan's record keeper, for example. While 58% of plan sponsors calculated the revenue, a large proportion — 42% — do not know or are not evaluating indirect revenue.

"Given all the lawsuits, fee discussions and level of plan sponsors' due diligence, I thought that would've been higher," Ms. McAllister said.


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