Is the Callan Study of Defined Contribution Plan Trends Telling A Story of Fear?
Callan Associates is an investment consulting firm that produces an annual report on trends in the defined contribution (DC) marketplace. This year marks the tenth year that Callan has conducted this study. This year’s study surveyed 165 plan sponsors to identify major trends in the industry. According to Callan, the study included over 85% of respondent companies having over $100 million in assets.
Atop the DC market trends, plan sponsors reported that a focus on fees was an over-riding concern. Specifically, lowering investment fees and recordkeeping fees were seen as an ongoing objective of plan sponsors.
“Plan sponsors described their review of plan fees as ‘continuous’,” said survey co-author and DC consultant Jamie McAllister. “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 recordkeeper search in 2017, this implies that fee pressure will continue.”
While not mentioned in the survey, it is likely that fear of an excessive fee lawsuit has accelerated the concern about seeking lower fees. Last year (2016), there were a record number of excessive fees lawsuits brought against plan sponsors. That trend is expected to continue in 2017.
Similarly, since the 2012 Callan survey where 66% of plan sponsors paid administrative fees (partially or fully 30%/36% respectively) from revenue sharing agreements, only slightly more than one third of respondents (38%) reported using revenue sharing agreements today. It should come as no surprise that revenue sharing agreements have been a major subject in DC lawsuits in 2016 as well. And while revenue-sharing is not prohibited, it is not a stretch to draw a line between the litigation over revenue-sharing and its declining use.
In the case of fees, there is no rule or law under ERISA or otherwise that says fees must be cheap. The rules state fees must be reasonable. The pendulum of prudence has decidedly taken the path of lower fees in any case, which is good for plan participants, so it’s having the desired effect whatever the true cause. However, the difference between cheap and reasonable may also lead to unintended consequences in the future.
If sponsors are blindly seeking lower fees in the interest of avoiding litigation risk, are they also limiting opportunities that could provide greater benefits to participants such as better-performing investment choices, education, etc? That remains to be seen also.
It’s not all about fear though, the Callan study also showed a sharp increase in auto enrollment and auto escalations among the respondent companies. The bottom line is that plan sponsors are under enormous pressures from many sides of the equation. Now more than ever, the actions of a plan sponsor are also under unprecedented scrutiny. Affecting better outcomes, complying with regulation and avoiding lawsuits makes this one of the most challenging times for plan sponsors.
