Plan sponsors remain wary of alternative investments, but have far from abandoned active management despite pressures to lower costs.
August 23, 2017
After years of steady decline, defined contribution plan fees have plateaued, according to consulting firm NEPC.
The firm’s 12th annual survey of DC plan sponsors representing $138 billion in retirement assets found that the average expense ratio for such retirement plans fell just a penny to 0.41 percent, or 41 cents, for every $100 in fund assets. Recordkeeping costs — the fees paid to administrators responsible for tracking DC assets — rose to a median $59 per participant, from $57 last year, according to a statement released Wednesday by NEPC.
The fees have stopped sliding after seven straight years of decline, as regulatory and legal pressures prompted plan sponsors to keep costs down for participants saving for their retirement. They’ve opted for lower-cost investment options, with some switching out actively managed funds for cheaper passive offerings that track stock indexes.
“Fees have been such a front-burner issue,” Ross Bremen, NEPC’s defined contribution strategist, said by phone Wednesday. “With so much litigation out there, plan sponsors have been very focused on a fee-related issues and, as a result, we’ve seen fees decline pretty significantly in recent years.”
In 2010, the average expense ratio was 0.55 percent, while median recordkeeping costs were $103 per participant, according to NEPC.
The DC retirement plan market “continues to be dominated by actively managed choices,” Bremen said, adding that very few plans are 100 percent passive.
Instead, plan sponsors tend to offer a mix of active and passive options, with traditional asset classes like large-cap domestic equities, intermediate-term bonds, and international equities remaining the most prevalent choices. Target-date funds also continue their stronghold, appearing in 94 percent of plans, and typically serving as the default investment option, according to the NEPC report.
Although alternative investment managers and private-equity firms have begun to edge into the defined contribution market, Bremen described the increasing use of non-traditional investment options as a “trickle as opposed to a tidal wave.” Real estate has made some headway in DC, appearing in 16 percent of plans, as have global asset allocation strategies such as risk parity, which are offered by 13 percent of plan sponsors.
“There’s been litigation, there have been questions about the risk of offering such strategies,” Bremen said. “At the end of the day, the largest plan sponsors have taken the approach that from a prudence perspective, it makes sense to be either custom and white label, or passive. The plan sponsors that have gone the white label route are the most likely to think about things like the inclusion of private assets.”
Given the “tremendous” interest in white label offerings, Bremen said there continues to be a role for managers who develop DC investment options that improve diversification and add alpha, so long as they charge “reasonable, DC-appropriate fees.” Currently, roughly 10 percent of target-date offerings are custom.
Despite the current pause on falling costs, NEPC predicts that DC fees will likely resume their decline next year as many plan sponsors are currently seeking new recordkeepers.
In addition, Bremen said that plan sponsors are increasingly moving away from “revenue sharing” arrangements in which costs are tied to investment options. A third of plans are now paying a fixed per-head rate, he said, while a similar percentage has eliminated revenue sharing.
“It’s a move toward low cost, but it also involves considerations of what is fair for plan participants,” Bremen said. “It’s an issue of the way that fees are paid.”