Reviewing plan fees continues to be a top priority of defined contribution plan sponsors, according to Callan’s recently released 2024 Defined Contribution (DC) Trends Survey.
The survey found top areas of focus for DC plan sponsors include plan governance and process, investment management fees, and administration fees. Fiduciary initiatives in 2023 centered on reviewing plan fees, the investment policy statement, and the investment structure—things the survey found will also be top areas of focus in 2024, with reviewing plan fees as the highest priority (74%).
About 6 in 10 plan sponsors calculated their administration DC plan fees within the past 12 months. Another 26% did so in the past one to two years.
Higher levels were seen for investment management fees; as a major target of litigation, reviewing the investment management fees regularly is considered best practice.
When calculating fees, over half of respondents also evaluated sources of indirect revenue (e.g., revenue shared with the recordkeeper from managed accounts, brokerage windows, IRA rollovers, etc.).
More fee findings
The survey found fewer than half of plan sponsors kept fees the same following their most recent fee review, while nearly half reduced fees.
Investment management fees were most often paid entirely by participants (89%), and almost always at least partially paid by participants (92%). By contrast, 66% of all administrative fees were paid entirely by participants, up significantly from three years ago (49%). Most plan sponsors (82%) noted that at least some administrative fees were paid by participants.
Notably, two-thirds of plan sponsors said they are either somewhat or very likely to conduct a fee study in 2024. Most respondents also indicated they are very or somewhat likely to review other fee types (e.g., managed account services fees) and indirect revenue.
Survey highlights variety of DC trends
Other somewhat or very likely actions include renegotiating investment manager fees (43%) and renegotiating recordkeeper fees (42%).
“This year’s survey shows how certain trends that have only emerged within the last few years are persisting—trends such as retaining assets in the plan, increased valuations of indirect fees, collective trusts prevalence over mutual funds, and more.”
Callan’s Jamie McAllister
Now in its 17th year, the survey of 132 plan sponsors covers the key tenets of DC plan management, painting a detailed picture of the challenges and opportunities that are important to DC plan sponsors.
“Our DC Trends Survey provides a benchmark for sponsors to evaluate their plans compared to peers, as well as actionable information to help them improve their plans and outcomes for participants,” said Jamie McAllister, senior vice president and DC consultant. “This year’s survey shows how certain trends that have only emerged within the last few years are persisting—trends such as retaining assets in the plan, increased valuations of indirect fees, collective trusts prevalence over mutual funds, and more.”
Indeed, the survey noted the prevalence of mutual funds for the TDF continued its decline. In 2010, 67% of plans used a mutual fund for their target date fund compared to 42% in 2020. This decreased notably further in 2023 to 28%.
Collective investment trusts (CITs) and mutual funds continued to be the most prevalent investment vehicles, with CIT usage only recently surpassing that of mutual funds.
In 2023, 94% of plans offered a target date suite and 90% used a target date fund (TDF) as their default for non-participant-directed monies.
Among those that offer TDFs, nearly 8 in 10 used an implementation that was at least partially indexed. The share of active-only strategies rose to 21% in 2023 from 15% in 2022, its lowest point in our survey’s history.
Additional findings from the survey:
- Only 18% of plan sponsors reported making changes to the number of funds in 2023. Roughly the same percentage indicated they are planning a change in 2024. Of those that made changes in 2023, there was an even split between those increasing the number of funds and those decreasing the number.
- More than three-quarters of plans did not offer an environmental, social, and governance (ESG) fund in the core fund lineup. But 9% will consider adding an ESG option in the future and the other 15% already do.
- More than a third of the sponsors in the survey conducted an investment structure evaluation within the last year, in line with previous years. More than 93% have conducted an evaluation within the last five years.
- Only 16% of sponsors plan to explore a recordkeeper search in 2024, down from the last two years’ survey results (24% in 2022).
- Most plan sponsors reported taking steps to prevent plan leakage. Actions included offering partial distributions (74%), installment payments (72%), and encouraging rollovers in from other qualified plans (64%).
- Most plans offered some sort of retirement income solution to employees by 2023. Installment payments (78%) and partial distributions (76%) were the most common. Providing access to a drawdown solution, managed accounts, or a defined benefit plan were the next most common.
Respondents spanned a range of industries, with the top being financial services and government. Nearly 90% of plans in the survey had over $200 million in assets, and 58% had more than 10,000 participants. More than two-thirds of respondents were corporate organizations, followed by public (16%) and tax-exempt (15%) entities.
Find the summary blog post and survey here.
SEE ALSO:
• CITs Dominate Investment Strategies for 2023
• Legislation, Regulation, Litigation Driving Change in 401(k) Plans: Callan