Drop in recordkeeping fees drives continued decline in plan costs, survey shows

Fees related to retirement investment accounts, especially recordkeeping costs, continue to decline, despite an increase in asset balances, according to a 2013 survey of defined contribution (DC) plan fees by NEPC, LLC. However, while recordkeeping fees have declined substantially, total plan costs have declined only slightly and investment management fees have remained constant, suggesting that providers may be merely rebalancing fee payments.

Note: The 2013 Defined Contribution Plan and Fee Survey reflects data from 95 plan sponsors covering over 1 million participants. NEPC notes that the survey, in its 8th year, provides an in-depth study of plan fees that reflects a calculation of numerical data, rather than a mere quantification of fees by plan sponsors.

Total plan costs

Total plan costs encompass a plan’s “all-in” costs, including fees related to investment management, recordkeeping, and all other administrative services paid by the plan sponsor and participants. The annual median total plan cost incurred by surveyed plan sponsors was 0.53%, or 53 cents for every $100 in fund assets. This represents a continued, but slight decrease from 0.55% in 2012, 0.58% in 2011 and 0.59% in 2010.

Investment management fees

Investment management fees represent the largest costs incurred by DC plan sponsors. The fees are assessed by money managers to cover the costs of maintaining the funds in the plans. The costs are expressed as the weighted average expense ratio, which covers all funds offered under a plan. Plan expense ratios have declined in recent years. Traditionally, weighted average expense ratios have ranged from 0.52% to 0.60%. However, the weighted average expense ratio reported in the 2013 survey was 0.52% or 52 cents for every $100 in the fund. While this ratio is unchanged from 2012, it represents a significant decrease from the 0.57% median weighted average expense ratio reported in 2006.

Recordkeeping fees

Recordkeeping fees, which reflect the costs related to documenting participant plan activity, are the second largest cost incurred by DC plans. The survey further expanded the scope of recordkeeping fees by including administrative costs, such as trust/custody services and communications. The 2013 survey documented a continued sharp decline in recordkeeping costs. The annual median recordkeeping fee reported in the 2013 survey was $80 per participant, compared to $92 in 2012 and $118 in 2006. Significantly, the decline in recordkeeping costs has emerged despite an increase in asset balances (represented by a 3% gain in the S&P 500 Index).

Revenue sharing

Recordkeeping fees are primarily charged through revenue sharing. Revenue sharing arrangements, however, have been consistently declining over the years NEPC has been conducting the survey. Thus, the weighted average revenue share (average of different levels of revenue sharing among options offered in a plan) was 0.10% in 2013, down from 0.12% in 2012, 0.14% in 2011, and 0.15% in 2010 and 2009.

Plan expense reimbursement accounts

Service providers may help sponsors offset administrative expenses by reimbursing the plans for a portion of the costs from revenue sharing fees received from mutual funds. Such Plan Expense Reimbursement Accounts (also known as ERISA Budget Accounts) are becoming increasingly popular. NEPC reported that 37% of plans benefitted from such accounts in 2013, compared to 29% in 2012.

Decline may continue

Plan fees, especially recordkeeping costs, may continue to decline, especially as the new disclosure rules provide sponsors with greater information on fees being assessed by providers. However, NEPC emphasizes that plan sponsors will have a heightened duty to evaluate whether service levels will be affected by reduced fees and whether the decreased fees represent actual savings or merely a rebalancing of payments.

Source: “2013 Defined Contribution Plan and Fee Survey,” NEPC Defined Contribution Practice Group.

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer’s Benefits Reports.

Visit our News Library to read more news stories.