Institute Publishes Results from the Deloitte/ICI Defined Contribution/401(k) Plan Fee Study

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November 29, 2011

TO: BANK, TRUST AND RETIREMENT ADVISORY COMMITTEE No. 72-11 RE: INSTITUTE PUBLISHES RESULTS FROM THE DELOITTE/ICI DEFINED CONTRIBUTION/401(K) PLAN FEE STUDY

 

Recently, the Institute published the 2011 update of the Deloitte/ICI Defined Contribution/401(k) Plan Fee Study.  The 2011 survey results are based on a sample of 525 defined contribution plans that completed an online survey between January and August 2011.  Nearly all of the plans in the sample are 401(k) plans, and the plans cover a wide range of sizes and characteristics. The 525 plans in the study were serviced by 50 different retirement service providers. 

The ‘All-In’ Fee

This study carries forward the concept of the ‘all-in’ fee introduced in the 2009 Deloitte/ICI fee study to create a measure that allows for comparison of fees across plans despite the variety of fee arrangements. The ‘all-in’ fee includes all administrative or recordkeeping fees as well as investment fees (i.e., the investment option’s total expense ratio), whether they are assessed at the plan, employer, or participant level. The ‘all-in’ fee was analyzed as a percentage of plan assets.

Apparent Drivers of the ‘All-In’ Fee

A key finding of the study shows that, for the companies surveyed, the number of participants and the average participant account balance in the plan are primary drivers of a plan’s ‘all-in’ fee as a percentage of plan assets. Specifically, plans with more participants and higher average account balances typically had lower ‘all-in’ fees, benefitting from economies of scale by spreading fixed administrative costs over more assets and participants.

The allocation of plan assets to equity investment options also was found to be a primary driver of plan fees in the analysis. Plans with higher allocations to equity investment options tended to have higher ‘all-in’ fees as a percentage of plan assets, consistent with the fact that equity investment options generally have higher expenses than other types of investments.

Three other factors also were found to be significant in explaining variation in defined contribution plans’ ‘all-in’ fees. Plans with more investment options tended to have higher ‘all-in’ fees than plans with fewer. On the other hand, plans with higher participant contribution rates or automatic enrollment tended to have lower ‘all-in’ fees.

Other Factors Were Not Found to Be Significant

A number of other variables were tested and appear not to be direct drivers of the ‘all-in’ fee. The number of payrolls, which might result in increased administrative complexity, was not found to be an apparent driver of fees. The number of business locations, which might have increased the complexity in delivering participant education, was not found to be a driver of fees. The type of service provider (mutual fund company, life insurance company, bank, or third party administrator), size of service provider, length of time since the last competitive review of the retirement service provider by the plan sponsor, and tenure with the service provider also were not found to be significant factors in a plan’s ‘all-in’ fee. In addition, the percentage of assets invested in the investment products of the service provider (proprietary investments) did not appear to have a significant impact on the ‘all-in’ fee as a percentage of assets.

The full analysis can be found in the report, Inside the Structure of Defined Contribution/401(k) Plan Fees, which is available at: www.ici.org/pdf/rpt_11_dc_401k_fee_study.pdf.

If you have any questions or comments concerning this study, please call me at (202) 326-5915 or email me at sholden@ici.org.

 

Sarah Holden
Senior Director, Retirement & Investor Research