Call it a race to the bottom. The past 10 years have been good for plan participants—both in enrollment and fees—but how much further can it go?
Investment consulting firm NEPC is out with its tenth annual “Defined Contribution Plan and Fee Survey,” which finds median recordkeeping fees, for instance, have fallen to $64 for each plan participant in 2015 from $70 a year earlier. Overall, the firm finds that recordkeeping fees have fallen 46 percent since the survey was first conducted and 9 percent year-over-year.
It’s great news, but has Ross Bremen, CFA, a partner at NEPC and the report’s author, concerned.
“This erosion in fees leaves little wriggle room for more cost savings,” Bremen writes. “Plan record keepers cannot continue to provide the highest levels of service if profit margins are non-existent.”
It’s not just with record keepers, but investment managers and plan sponsors as well.
“They have to balance the quality of services provided with their efforts to cut costs and improve transparency,” he adds. “To this end, plan sponsors may be better served if they examine their recordkeeping fee structures, exploring the potential to migrate to a more explicit fee model, for instance, one that charges a fixed-dollar amount per plan participant.”
He points to three areas of any study involving defined contribution plan fees that garner the most attention: total plan fees, investment management fees and recordkeeping fees, before adding one more—the way in which plan sponsors contracted with their record keepers.
“Perhaps the most notable observation is the growing appeal of recordkeeping fee structures based on a fixed-dollar amount per plan participant …Fixed-dollar arrangements now account for 47% of plans in our [s]urvey. While previously popular among larger plans, that is, those with $1 billion or more in assets, fixed-dollar arrangements are now increasingly prevalent among mid-size plans with $100 million to $500 million in assets, according to the survey.”
Bremen concludes by noting that “fees cannot be assessed in a vacuum” and that a race to the bottom with the lowest fees “can do a disservice to plan participants if quality suffers. The marketplace has already witnessed consolidation of record keepers, a sign that fees cannot decline indefinitely.”
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
