Just as they are combing through health plans looking for cost-cutting opportunities, so are employers trimming the fat off employee 401(k) plans. However, in general, they are attempting to do so without sacrificing investment quality. Plans with lower fees have become popular, as have those that offer participants more options, some of which combine lower fees with solid returns.
All of these observations come to us fresh from an Aon Hewitt survey of 400 defined contribution plan sponsors. Their plans cover more than 10 million employees with a total of $500 billion in retirement assets. These sponsors were asked about their retirement benefits strategies, plan designs and investment structures.
When last asked about such matters in 2007, just more than half of the respondents said they were working to reduce fund or plan expenses. This time around, more than three-quarters said they looking for ways to cut such costs.
The most common methods for doing so were switching share classes to less costly alternatives (62 percent) and swapping out funds for lower-cost alternatives (50 percent).
The survey identified lower fees are the No. 1 reason for choosing fund options. Other top factors included historical investment performance and fund investment process. Once powerful factors such as name recognition and availability in public sources were no longer seen as priorities.
“One of the most direct ways to increase participant balances is to increase their returns, which can be done effectively by decreasing investment fees without sacrificing investment quality,” said Rob Austin, director of Retirement Research at Aon Hewitt. “Even small changes in 401(k) fees can have a significant impact on employees’ nest eggs over time. For example, decreasing fees from 1 percent to 0.75 percent per year has the same effect on a typical participant as contributing an additional 0.50 percent of pay. This ultimately translates into thousands of dollars more in retirement savings.”
Other highlights from the Aon survey:
More than 90 percent of employers offered non-mutual fund alternatives — such as collective trusts and separate accounts — in their 401(k) menus, compared to 59 percent in 2007.
44 percent chose these alternatives as their primary fund options in 2013, compared to just 19 percent in 2007.
30 percent offered plan participants emerging market funds this year, compared to 15 percent in 2007.
14 percent offers participants short-term bond funds, compared to 8 percent in 2007.
Another trend spotted by the survey: Large increases in the index approach were found in mid-cap equity (59 percent in 2013 vs. 42 percent in 2011), intermediate bond (53 percent in 2013 vs. 42 percent in 2011), and international equity (50 percent in 2013 compared to 31 percent in 2011).