Stewardship. What does this mean for a Plan Sponsor? The careful and responsible management of something entrusted to one’s care. As a Plan Sponsor, you aim to make rational and advantageous decisions to offer a competitive plan and benefits for your participants, using best practices whenever possible. With this purpose in mind, DiMeo Schneider & Associates, L.L.C. strives to gather market intelligence and examine industry trends to share these best practices.
In an effort to aid Plan Sponsors and assist with the assessment of their plans in comparison to the market, we conduct the annual DiMeo Schneider & Associates, L.L.C. Defined Contribution Survey. This year marks the survey’s 4th iteration in which we partnered with a similar size institutional consulting firm to assemble the data. The survey includes over 400 defined contribution plans, $68 billion of assets and 850,000 participants, with an average plan size of $165 million.
Since the inception of the annual survey in 2013 versus 2016, we have found the following key trends among DC Plans:
• Plan fee reductions and increased transparency
• Addition of Roth 401(k)
• Automatic enrollment (“AE”) enhancements
Fee Reduction and Transparency
Plan fees continue to be a focus for plaintiff’s attorneys, and not surprisingly, top of mind for Plan Sponsors. Over the last three years,recordkeeping/administration fees have declined by an average of 15% for small, mid and large size plans. While this pace of decline is not expected going forward, Plan Sponsors are now concentrated on improving the fee structure and allocation methodology to participants.
Our latest survey reports that DiMeo Schneider clients are now evenly split between per participant, asset-based and combination (hard-dollar and asset-based) fee structures across their recordkeepers. Notably, most recordkeepers price the vast majority of new business based upon the number of participants in a plan (per participant basis) which aligns well with the services being offered by the vendors. Over 75% of sponsors allocate recordkeeping fees to participants while the remaining sponsors generally share some portion of the responsibility.
The 2016 weighted average investment fees for the surveyed plans declined by 19% over the last 3 years to 0.42%. This significant drop is largely due to Plan Sponsors utilizing lower cost share classes, collective investment trusts and separate accounts in order to reduce or eliminate revenue sharing as well as overall investment management expenses. As a result, median plan revenue sharing fell by over 45% during the period (2013 median plan revenue sharing was 0.13% of plan assets versus 0.07% in 2016). The increased utilization of passive index products has also contributed to the reduced plan investment expenses.
Fee transparency has also emerged as another prominent trend as sponsors seek to improve fee disclosure and visibility to plan participants. With advances in technology, recordkeepers are now more technologically prepared to administer participant revenue sharing credits to mitigate the inequality of revenue sharing among a plan’s investment options. Consequently, a growing number of sponsors are evaluating plan fee structures and the allocation methodology that more equitably allocates fees among participants.
Roth 401(k)
Plan Sponsors continue to search for ways to enrich participant benefits without negatively impacting the corporate balance sheet. Providing participants the ability to make after-tax Roth 401(k) deferrals is one such service offering. Generally speaking, adding a Roth deferral contribution source is relatively easy and entails low or no cost from both a payroll and recordkeeping perspective. The Plan Sponsor Council of America (“PSCA”) reports that 55% of sponsors offer Roth contributions in their most recent 59th Annual Survey of Profit Sharing and 401(k) Plans, while 70% of DiMeo Schneider & Associates DC clients allow Roth deferrals. PSCA reports 12-16% participant Roth utilization for all plan segments above 200 participants.
Automatic Enrollment Enhancements
The adoption of automatic enrollment can be complicated from both a philosophical and monetary perspective. However, since 2013 we have seen a 16% increase in our clients adding automatic enrollment features. Approximately 65% of our clients now offer AE to help guide their employees to a more comfortable retirement. Though AE may be considered paternalistic, utilizing this inertia can improve an employee’s long-term financial health.
Implementing the right AE features is critical to the long-term success of the plan as a poorly designed AE program can actually hinder participant savings rates. Suggested design features include a 6% initial deferral rate, 2% annual automatic increase and a maximum deferral rate up to 20% for the annual deferral increases. It is equally important to consider applying AE to all employees that fall below the 6% deferral rate and revisiting those employees annually to ensure they understand best practices. Our 2016 DC Survey reflects dramatic improvements to current AE plans. The percentage of plans using a 4% or greater initial deferral rate has more than doubled to 34% and approximately a quarter of plans have a maximum deferral of greater than 10%.
Conclusion
Given these recent trends and best practices, what should you consider as a Plan Sponsor? ERISA is ultimately a process-oriented rule and therefore, Plan Sponsors have a duty to follow and maintain a prudent process when determining whether plan fees are reasonable and necessary. The most accurate method to make this assessment is to conduct a Request for Proposal (RFP).
As fee reduction and transparency continue to be hot topics, it is imperative that Plan Sponsors define a specific process for making plan decisions and document these decisions throughout the life of the plan. With fees declining significantly in recent years, we may be reaching a bottom and Plan Sponsors should continue to evaluate more equitable ways to allocate fees, particularly those that are paid by participants. They should consider, for example, eliminating the inequalities of revenue sharing-based fee allocation. Best practice today is to neutralize this inequality by either eliminating revenue sharing from the plan, if possible, or allocating it back to participants who are invested in those specific funds. For Plan Sponsors who allocate recordkeeping fees to participants, they should conduct comprehensive analysis on a pro rata or per capita allocation of the hard dollar recordkeeping fee.
The following highlights a general guide/decision matrix on how to potentially restructure plan fees:
1. Select fee structure with recordkeeper (per participant, hard dollar, asset-based)
2. Determine who will pay recordkeeping fees (participants, company, combination)
3. Decide on allocation method (per participant, asset-based, etc.)
4. Elect a revenue sharing methodology (participant revenue credit, ERISA spending account, offset plan fees)
Above all, we recommend that you discuss your plan and its specificities with your dedicated DiMeo Schneider Consultant. For assistance with your plan’s fee structure and other plan design enhancements, please contact any of the professionals at DiMeo Schneider & Associates, L.L.C.
