Regulations Are Sponsors’ Primary Concern

Reducing plan costs and reevaluating the investment menu trail regulations for top sponsor concerns.

Asked their top three retirement plan issues, 49% of sponsors first cite complying with regulations, followed by reducing plan costs (47%), and reevaluating the investment menu (45%), according to a new report from Cogent, “Navigating Change in the 401(k) Market: Key Insights for DC Plan Providers and Investment Managers.”

“In what may be a warning for incumbent providers, one quarter (25%) of plan sponsors intend to reevaluate their plan provider in the next 12 months, up from 18% in 2014,” Cogent said.

Fully half (50%) of plan sponsors intend to make some kind of change to their investment menu in the next 12 months, and 35% expect to change the mix of plan investments.

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In terms of how the fee disclosures have impacted plan sponsors’ relationships with their providers, 55% say they will maintain the fee arrangement they have with their current plan provider. However, 22% plan to request fee reductions, 14% intend to change bundled fees to direct fees, and 13% plan to issue a new request for proposal (RFP) for recordkeeping services.

As to how the fee disclosures have impacted sponsors’ treatment of investments, 31% are now benchmarking the plan investment fees on a regular basis, 25% are negotiating lower fees for existing investment options, 12% have changed some or all funds to lower-fee share classes, 12% have either reduced or eliminated revenue-sharing arrangements, 10% have consolidated the plan investment menu, 9% have considered a multi-manager options, and 5% have mulled a collective trust.

NEXT: Plans to switch plan providers

Perhaps most surprisingly, Cogent says, 75% of plan providers say they are at least somewhat likely to initiate a formal review of their 401(k) plan over the next 12 months. Among this subgroup, 15% say a switch in providers is highly likely, and 50% say it is somewhat likely. Thirty-six percent are certain they will not initiate a change in providers in the coming year.

All plan sponsors are regularly evaluating their providers, with annual reviews the most common. When they evaluate their providers, the top five factors they look at are: quality of investment options (cited by 55%), plan administration fees (48%), range of investment options (48%), overall service quality for participants (46%) and plan investment fees (43%).

“Notably, the criterion of plan design features is identified by 37% of plan sponsors this year, up from 30% in 2014, suggesting that plan sponsors may be looking for a greater level of support from their providers in optimizing the design of their plans,” Cogent said.

Asked why they are likely to review or switch providers, the top reason sponsors cited was plan administration fees (41%), followed by quality of investment options (33%), plan investment fees (33%), range of investment options (30%) and overall service quality for participants (30%).

As to plan sponsors’ reasons for dropping or reducing investment managers, the overwhelming cause is underperformance relative to benchmarks, cited by 59%. Other factors include investment team turnover (27%), to seek funds with lower fees (26%), organizational instability (13%), and poor understanding of the sponsor’s goals and objectives (11%).

NEXT: Implications for plan providers

No longer operating on auto pilot, changes within the 401(k) industry are taking the forms of increased incidence of formal plan reviews and intention to switch providers and modify investment lineups, Cogent said. “With many taking counsel from an external consultant or financial adviser, plan sponsors are clearly articulating what they want from a provider, so it is up to firms offering 401(k) plans to follow through with a differentiated offering that is competitively priced, provides high-quality choice in investment options and supports strong fiduciary practices.”

In short, providers cannot afford to be complacent, Cogent said. They need to defend their administration fees and participant service quality, along with the quality and range of their investments, the research firm said.

Cogent’s report is based on two separate surveys of 401(k) plan sponsors, the first conducted in February and March, and the second in March and April. Cogent’s full report can be viewed here.

N.J. Supreme Court Will Consider COLAs

Retirees in New Jersey’s public pension system could see cost of living adjustments restored by the state’s Supreme Court. 

An updated docket sheet on the New Jersey State Supreme Court website confirms the court will take up an important case considering whether a pension reform measure passed by Governor Chris Christie improperly suspended cost of living adjustments for state pensioners.

Many New Jersey public sector pensioners saw their cost-of-living adjustments (COLA) suspended under a pension-reform bill signed in June 2011 by New Jersey Governor Chris Christie, aimed at closing an approximately $11 billion unfunded liability through a variety of changes and overhauls. Among the reforms, retirees in the system were required to give up COLAs until pension plans in the state reached certain funding hurdles, generally 80% funded.

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At the time, the state pension system only had assets to cover 62% of liabilities, and sought to reach an 88% funding goal over the next 30 years. Retirees were to be compensated for giving up their COLAs through larger pension contributions to be made by the state in subsequent years, but the increases did not materialize due to budgetary pressures and a change of position from Governor Christie. This lead to a string of challenges from state workers, retiree groups and individual pensioners.

Now the Supreme Court says it will consider the following question: “Is the State of New Jersey entitled to sovereign immunity with respect to plaintiffs’ federal Contract Clause claim; and do these public-employee plaintiffs have a contractual right to the payment of cost of living increases?”

NEXT: A second challenge for Christie

This is a different approach from an earlier challenge to the reform package, which was the subject of another New Jersey Supreme Court decision handed down earlier this summer. That challenge, which proved unsuccessful, sought to force Governor Christie to comply with the parts of the reform package that pledged greater pension fund contributions from the state—claiming the pensioners had a contractual right to the increases based on their formal agreement with the state.

According to the court’s opinion in that case, the negotiating parties may have included contractual words in the reform legislation that intended to compel the Governor to make good on his funding promises, “but those words, no matter their clarity, could not create an enforceable contract. Voter approval is required to render this a legally enforceable contractual agreement compelling appropriations of this size covering succeeding fiscal years…”

The court said the promised contributions are enforceable only as an agreement that is subject to appropriation, which under the Appropriations Clause of the State Constitution renders it subject to the annual budgetary appropriations process. “In that process, the payment may not be compelled by the Judiciary.”

The current challenge, on the other hand, seeks to void central portions of the reform package itself, under which the COLA suspension is being enforced.

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