While the retail and institutional market both live in the same worlds, sometimes it seems like they are from different universes. The recently released 17th annual NEPC 2022 DC Plan Trends & Fees Survey, while not shocking, provides insights into what is really happening with larger DC plans, which may portend changes in the retail DC market.
The days of dramatic administrative and investment fee declines are mostly over and not even highlighted in the publicly available deck. Both areas saw slight declines with the most record keeper fee drop in the “smaller” sector (1,000-5,000 participants) and the greatest investment decline in the mid sector (5,000-15,000), mostly following trends in the retail market reported by the 401k Book of Averages.
Fixed dollar administrative fees have gained the most traction over the past five years growing from 53% in 2017 to 65% last year while fixed percentage arrangement decreased from 18% to 15%.
There were some myth busters in the NEPC Survey and some confirmations including:
- TDFs continue to gain traction now at 46% of plan assets garnering 70% of new contributions. Bill Ryan, NEPC’s head of DC solutions, predicts that most assets will be in target dates in three to five years.
- Managed accounts are available in 38% of plans but only 5% of participants utilize them, resulting in just 4% of plan assets. Fees are declining rapidly as low as 9 basis points and have become negotiable with some new entrants charging participants a $10 monthly fee. How low will they go?
- ESG-labelled funds are available in just 6.2% of plans with a miniscule .03% of plan assets yet 85% of managers incorporate ESG factors in their investment. Usage of DE&I factors is much lower at 10% as Ryan says it takes longer to make organizational changes.
- Participants hold an average of 2.5 funds because of the proliferation of TDFs with 66% active. Lineups are being streamlined according to Allison Lonstein, principal at NEPC, who is surprised that indexing has not grown more in some sectors like large cap value.
- Most retirees hold some form of retirement income but primarily through TDFs with very low usage of retirement income solutions in the few plans offered.
- Though there was a 94% increase in usage of OCIO, just 10% of clients leverage it overseeing 9% of assets. Lonstein anticipates growth with 25% of prospects interested. Ironically, Ryan sees this is a trend moving up market.
Surprising to me was that there was nothing about financial wellness or advice as NEPC did not even ask the questions. Though they do not currently offer PEPs, Ryan says their interest is based more on clients’ desire to limit liability more than NEPC’s interest to move down market. If 15 plans, for example, are part of a PEP with the same fees, it is harder for participants to claim they are unreasonable.
Things move slowly in the DC world, especially with larger plans more concerned about liability and costs than innovation and outcomes. While it might make sense to offer in-plan retirement income and managed accounts for older participants, the reality is that these services have been around for decades and usage remains stuck in the single digits.
The appetite and runway for TDFs keeps growing and is the likely vehicle for income solutions and even advice. And while the ESG fade appears to be sunsetting with so much uncertainty about what the government will and will not allow, the best managers seem to incorporate the principals without the hype.
Fred Barstein is founder and CEO of TRAU, TPSU and 401kTV.