Sponsors of large and mega 401(k) plans are continuing to step up oversight of retirement plans and in many cases are taking a more paternalistic approach to plan design.
Gone, it would seem, are the days of offering a vanilla defined contribution vehicle and leaving participants to figure out a savings system on their own.
Last year, nearly 85 percent of sponsors surveyed in Callan Associates annual Defined Contribution survey offered some form of investment guidance or advisory services to plan participants. That was up from about 70 percent in 2014.
And one-half of sponsors offered a retirement income solution, a nearly 10 percent increase from 2014, though a deeper look at Callan’s data shows sponsors rarely offer in-plan annuities as income vehicles.
Callan’s data shows that automatic escalation is becoming a standard feature of modern DC plan design, at least among large and mega sponsors.
Last year, 63 percent of the 165 sponsors surveyed by Callan used an auto-escalation feature, compared to 42 percent in 2014. About eight in 10 sponsors had at least $100 million in plan assets.
Lori Lucas, Callan’s defined contribution practice leader and an author of the study, says plans sponsors have made tremendous strides in administering and designing DC plans.
“Sponsors have made great progress over the past decade,” said Lucas in an email. “The majority are now calculating and benchmarking fees on a regular basis, and the use of investment policy statements to guide decision making is now the norm.”
But Lucas cautions that further evolution will be needed.
“Sponsors should be careful not to rest on their laurels,” she said. “Reviewing plan fees, keeping the investment policy statement up-to-date, and documenting all decision making are ongoing tasks. We’d also like to see more plan sponsors consider implementing a fee policy statement in order to make sure everyone involved in decision making knows who pays plan fees, how they are paid, and how revenue sharing is supposed to be handled.”
San Francisco-based Callan Associates consults on more than $2 trillion in retirement plan assets. Here are key highlights from the firm’s 2017 survey.
1. Impact of Labor’s fiduciary rule
Callan surveyed sponsors before last November’s election, when the financial services industry was fast at work preparing for the Labor Department’s fiduciary rule. Hilary Clinton, presumed by most to win the election, had pledged her support for the rule on the campaign trail.
Sponsors noted several areas of plan oversight they expect to change under the rule, but notably, one-third of sponsors were unsure about what changes would be required, or assumed they would be unaffected by the rule.
More than four in 10 sponsors said communications on plan rollovers would be impacted, and four in 10 said their education and communication materials would be impacted by the rule.
2. Confusion over investment advisors
More than 80 percent of plans use an investment consultant, but that doesn’t mean sponsors understand what they do.
Nearly 35 percent of sponsors in the report who are using an advisory consultant were unsure if the fiduciaries acted in a 3(21) or 3(38) capacity.
When sponsors are clear on the type of fiduciary consultant they use, most report working with 3(21) advisors.
3. Company match
About one in five sponsors increased their company match in 2016, and in 2017, 18 percent of sponsors said they intend to increase their match.
But 12.5 percent of sponsors reduced their match, and another 4 percent eliminated it. And 9 percent expect to reduce their match in 2017.
4. TDFs majority of sponsors’ QDIA
When sponsors do default participants into an investment, the vast majority—94 percent—uses a qualified default investment alternative under the Pension Protection Act of 2006.
Target-date funds are the predominate QDIA option—88 percent of sponsors use TDFs as their QDIA, up from 75 percent in 2014.
Only 2.5 percent of sponsors use managed accounts as a QDIA.
5. Variety of TDFs offered
Nearly 93 percent of sponsors offer a TDF option. Sponsors use record-keeper’s proprietary funds only 33 percent of the time.
Nearly two-thirds of funds use partially indexed strategies, and more than one-third of TDFs are fully indexed.
Almost half of sponsors took some action regarding their TDF options in 2016, mostly in the form of evaluating the suitability of funds’ glide paths. About 17 percent changed funds, and another 13 percent changed the share class of TDFs.
Fund performance and fees were sponsors’ top criteria for choosing a TDF.
6. Investment menus
About half of sponsors use a “tiered” investment menu design, an approach that has increased since 2015.
In a tiered structure, sponsors offer three options: the top tier is a "do-it-for me" approach, which typically offers a TDF; the second is a go-it-alone option for participants, which allows them to select from a menu of mutual funds; and the third tier is for investment-savvy participants, which typically allows access to a brokerage window.
Most sponsors—66 percent—offer a mix of passive and active mutual funds. Only 6 percent of sponsors rely solely on passively managed funds.
Far more sponsors are using collective investment trusts, which are typically less expensive than standard mutual fund offerings. In 2016, 65 percent offered a CIT, up from 48 percent in 2012.
7. Fund replacement at an all-time high
Almost half of sponsors changed funds last year, an all-time high in 10 years of Callan surveys.
By comparison, only 25 percent of sponsors changed funds in 2010.
Among investment styles, large-cap equity funds were most commonly changed out.
8. Record-keeping fees
About half of sponsors said they will likely look to renegotiate record-keeping fees in 2017, and 25 percent said they will conduct an active record-keeper search.
More than 60 percent say they will conduct a fee study, and almost half are preparing to switch some funds to lower fee share classes.
Nearly 30 percent said they would move actively managed funds to less expensive passively managed funds.
And 27 percent said they are looking to reduce or eliminate revenue-sharing agreements with fund companies as a way to pay for plan expenses.