Managed Accounts and Financial Wellness Are Growing Plan-Sponsor Priorities

Callan found that reviewing plan fees is the top fiduciary initiative in 2024 for 74% of plan sponsor respondents, followed by considering the investment policy statement and investment menu structure—similar to last year’s fiduciary focus areas, according to the investment consulting firm reporting results from its survey of 132 DC plan sponsors conducted in late 2023. 

Reviewing plan fees and investment options are top fiduciary priorities for plan sponsors in 2024, but financial wellness and managed accounts are gaining ground in importance as benchmarked against prior years. Plan governance and process — or what Callan cited as the “basic blocking and tackling that sponsors do on an ongoing basis” — also ranked highly.

Fee considerations, the firm noted, can encompass a variety of expenses ranging from administration fees, participant transaction fees, compliance, custody, communications and indirect revenue, such as revenue shared with the recordkeeper from managed accounts, brokerage windows and IRA rollovers. Investment management fees, however, were found to be a top area of focus as those expenses are often the target of litigation, the firm found.

Callan itself recommends a deeper dive on fees every three years, with regular annual check-ins, particularly in light of the “litigious environment,” says Jamie McAllister, senior vice president and DC consultant. She also noted a shift toward more nuanced fee evaluation and greater transparency of fees, including taking into account the full picture of managed account revenue sharing, self-directed brokerages and indirect revenue from rollovers.  “I think we are seeing a lot more sophistication around fee evaluation,” she says.

Two-thirds of plan sponsors are either somewhat or very likely to conduct a fee study this year, coming off a 12-month stint when six out of 10 have considered fee structures. Fewer than half of those plan sponsors that reviewed fees kept them the same, and nearly half ended up with reductions. Notably, more than half of plan sponsors said they plan to move to a lower-cost investment vehicle, such as from an R6 share class to a collective investment trust—a figure that increased from 42% in last year’s study, according to Callan.

McAllister also notes findings in this year’s research that more plan sponsors are aiming to keep participants in the plan at much greater rates than in the past. Callan found that about 81% of plan sponsors want to keep retiree assets in plan, and 61% seek  keep terminated assets. This is a “180 shift” from the past, when plan sponsors generally wanted people to exit the plan.

“So many plan sponsors are putting together these best-in-class fund lineups and plan features, all at a low cost from an administrative perspective, that they want to keep the participants benefitting from it,” she says. “There’s also, on the flip side, the fact that the larger account balances of keeping the plan bigger as a whole can create more economies of scale—there’s a benefit to keeping cash flow in the plan as opposed to having them rollover assets.”

Callan also, for the first time in its surveying, asked plan sponsors if they were recommending that participants roll in other defined contribution assets—with just 22% saying they are promoting consolidation of accounts. The relatively low figure was interesting to McAllister, particularly in light of plan sponsors seeking to keep people in plan.

“That’s one where hopefully we will see an increase in coming years because we see a lot of benefit to having your assets in one place,” she says.

Advice Services Trending

While fees remain a focus area, participant advice services and offerings are trending upward, according to Callan.

Desire for financial wellness tools, at 70% of respondents in 2023, marked a significant increase from the past, according to McAllister. But some of that change, she notes, might be from people viewing the term more broadly and answering yes if they offer some kind of financial education or advice options to participants.

Meanwhile, plans reported the highest levels of satisfaction from investment advisory services, and full financial planning got the highest market with 100% of respondents very or somewhat satisfied with those services.

Managed accounts, for their part, saw a “meaningful uptick” in use, with 58% of plan sponsors offering the services. Of those offering the more personalized participant service, 70% monitored them by reviewing participant usage and interaction, while just over 60% reviewed fees and services.

While managed accounts have made inroads, they also ranked highest in terms of dissatisfaction from plan sponsors. McAllister attributes that to plan sponsors at times questioning the engagement of the services being offered and how well the providers are doing in getting participants to benefit from them.

“Are participants using it [the managed account] correctly or using it to the fullest extent to justify that cost?” she says. “If the participant is using it, then we can see the cost being justified, but a lot of times we do find that participants are not adding the information and are not being as active with the tool.”

Providing retirement income options was also a focus for plan sponsors in 2023, though the majority offered management through installment payments (78%) and partial distributions (76%), as opposed to the newer in-plan annuity products being highlighted by providers in the market today.

Investment Menu Moves

When it comes to investment menus, target date funds still rule as a default for plan sponsors, with 94% of plans offering a target date suite and 90% using a TDF as their default for non-participant-directed savings, according to Callan. Indexed strategies are by far the most popular among those options, with nearly 8 in 10 sponsors using at least partially indexed funds, with active strategies at about 21% usage rates. For context, Callan noted that the 21% is up from 15% in 2022, the lowest rate for active usage in the study’s history.

Mutual funds for the TDF option, meanwhile, are continuing to decline in usage in DC plans in part due to the rise of CITs—with only 28% of plan sponsors saying they used mutual funds for the TDF, a drop from 67% back in 2010.

While TDFs remain popular, plan sponsors are increasingly scrutinizing their offerings, according to the researchers. All respondents indicated that they benchmarked their TDFs, but nearly eight in 10 said they use multiple benchmarks. Meanwhile, over seven in 10 took at least one action to change to a TDF suite in 2023, most commonly evaluating suitability of the underlying funds and the glide paths.

Finally, even as environmental, social and governance investments continue to dominate headlines, more than three-quarters of plan sponsors said they did not offer funds labeled as ESG in the core fund lineup, only 9% will consider such an option in the future, and just 15% already do.

Callan’s survey, which it has been conducting for 17 years, incorporates responses from both Callan plan sponsor clients and other organizations across a range of industries, with almost 90% of plans holding more than $200 million in assets and 58% with more than 10,000 participants. Over two-thirds of respondents were corporate organizations, followed by public entities (16%) and tax-exempt organizations (15%).