Top Issue Currently ‘Reshaping’ 401ks

CITs in, mutual funds out in 2016

Fees are the focus for 401k plan sponsors and advisors.Fees are the focus for 401k plan sponsors and advisors.

If anyone’s surprised, they’ve been asleep for quite a while. Research and consulting bigwig Callan Associates is out with its  annual “Defined Contribution Trends Survey,” and reveals that (what else?) fees in 401ks are playing a heightened role in driving plan sponsor decision-making.

“Reviewing plan fees was cited as a key area of fiduciary focus, both now and for the foreseeable future,” according to the San Francisco-based Callan.

An increase in record keeper search activity, movement to institutional fund structures, de-emphasizing revenue sharing, and adoption of fee policy statements are all related to the fee focus.

“Plan sponsors described their review of plan fees as ‘continuous’,” survey co-author and DC consultant Jamie McAllister said in a statement. “This includes both investment fees and recordkeeping fees. Recordkeeping searches often result in fee reductions. As a quarter of our survey respondents said that they were very or somewhat likely to conduct a record keeper search in 2017, this implies that fee pressure will continue.”

When Callan first asked the question in the 2012 survey, plan sponsors reported that the majority of participants paid administrative fees either “solely” or “partially” through revenue sharing. In 2016, just over a third said that revenue sharing was used to pay such fees.

“In 2012, plan sponsors had fewer fee payment options,” added Lori Lucas, Callan’s DC practice leader. “Today, there are far more mutual funds and daily-valued collective investment trusts (CITs) without revenue sharing, and even when there is revenue sharing, plan sponsors can rebate it back to plan participants in ways that weren’t previously available.”

Plan sponsors’ movement away from mutual funds to CITs is also primarily driven by fees.

Nearly two-thirds of DC plans offered CITs in 2016, up from 48 percent in 2012. Meanwhile, mutual funds have decreased in prevalence from 92 percent to 84 percent over that same period.

Not surprisingly, fees are also driving the increased use of indexed funds. In 2016, far more plan sponsors reported increasing the proportion of passive funds in their plan than increasing the proportion of active funds.

Importantly, over 47 percent of plan sponsors have a written fee payment policy in place, either as part of their investment policy statement or as a separate document. This is the highest rate ever recorded in Callan’s survey.

Other survey findings include:

  • Auto features: The use of automatic contribution escalation increased markedly over the past year. Caps on automatic contribution escalation have also markedly increased.
  • Fund changes: Nearly half of plan sponsors reported making a fund change due to performance-related reasons. This is the highest in the survey’s history. Large cap equity was the most commonly replaced fund.
  • Target date funds: Plan sponsors that took action with their target date fund in 2016 most commonly cited evaluating target date suitability as the most prevalent course of action.
  • Money market funds: Largely in response to money market reforms going into effect, 64 percent of respondents have changed to a different money market fund or eliminated their money market fund altogether.
  • Fiduciary Rule: Respondents believe the Department of Labor’s 2016 Definition of a Fiduciary Rule will primarily impact the plan’s printed materials, website, and other educational materials, and communication regarding plan rollovers.

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