Have Defined Contribution Plan Fees Hit Rock Bottom?

I recently read the results of the 12th Annual NEPC Defined Contribution Plan and Fee Survey, showing that fees remained steady from those reported in 2016. Specifically, the survey found that “DC (defined contribution) plans have a median recordkeeper, trust and custody fee of $59 per participant, a slight increase from $57 in 2016. The asset-weighted average expense ratio for DC plans is currently 0.41%, consistent with the ratio reported in NEPC’s 2016 survey (0.42%).”

So, are the survey results showing a potential bottoming–out in plan fees? In my opinion, providers and other retirement plan stakeholders are now balancing the scale on costs vs. the value being delivered to plan sponsors. Being viewed in a commoditized fashion is not the goal of any plan recordkeeper. Logically, DC plan recordkeepers can only lower fees so much until they start reacting with lesser services and customization.

It appears there have been two primary forces behind the seven-year long downward trending in DC plan fees. First, fee litigation has certainly put sponsors on alert and has prompted them to know not only what the fees are in their plans, but how they are actually being assessed (i.e., revenue sharing). The second driver was the Department of Labor`s ERISA 408(b)(2) fee disclosure regulation that was implemented in 2012 mandating plan sponsors to proactively determine fee reasonableness.

Hearing from the plan provider community is important, so I reached out to a friend and peer, Tim Rouse, Executive Director of the SPARK Institute. The SPARK Institute helps to shape national retirement policy by providing research, education, testimony and comments on pending legislative and regulatory issues to members of Congress and relevant government agency officials. SPARK also represents the largest recordkeepers of defined contribution plans. I posed a couple of questions to Tim on the topic:

Jonathan: “What is your overall view of the plan provider landscape and is more consolidation on the horizon?”

Tim: “Plan sponsors are no doubt at a significant crossroad in managing their plans. The new fiduciary regulations have caused many of them to examine their provider`s communications and education service to make sure they are in compliance. Personalized communications and education was a trend that might start to get reversed as a result of the new fiduciary regulations. In its place, plans might lean more on auto-features to ensure participants stay active and involved in their plans. With fees continuing their downward drift, consolidation has been a concern for my Association. However, there are signs that fees may have started to level off. There are even some new entrants into the recordkeeping market, like Captain 401(k), ForUsAll, Financial Intel, DreamForward, Vestwell, HR Ease and Save Day.”

Jonathan: “Do you feel we are moving away from Fee Compression, where plan sponsors are better able to assess and interpret the value being provided to them and their participants?”

Tim: “Time will tell how successful these newer firms will be, but their existence points to plan sponsors being interested in more than just the cheapest fee. Instead, plan sponsors are focusing on plan and participant experience and service”.

To look at plan fees from a different perspective, we can look outside the U.S. to the UK, where their government actually implemented a 0.75% cap assessed on the default funds of all qualifying schemes using auto-enrollment in their plan design. This bold move made back in April of 2015 created major adjustments for firms providing investment management services to plans and was met with a lot of controversy from industry stakeholders.

So here in the U.S., we have a regulatory impact coupled with fee litigation that has been putting consistent pressure on plan costs for the past seven years. In my opinion, the retirement plan marketplace is now reacting by finally and effectively communicating the value side of a traditional cost-benefits analysis. Like the adage “you get what you pay for”, I do not think everyone would choose to buy the cheapest car, where quality is sacrificed because of too much pressure on costs.