Benefits March 14, 2008

Sponsors not Models of Confidence on Plan Fees

March 14, 2008 (PLANSPONSOR.com) - Plan sponsors may insist they are comfortable with fee disclosure efforts as they exist now, but a new Chatham Partners study asserted that many of them are racked with under-the-surface doubts about their understanding of the fee issue.
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A Chatham news release said plan sponsor concerns about potential legal action, higher plan expenses, and participants selecting suboptimal investments make them less satisfied with their current fee structure and more likely to switch providers. “Plan sponsors are starting to realize what they don’t know about fees. The collective epiphany is going to play into the hands of retirement plan providers at the leading edge of full disclosure,” noted Andrew McCollum, Managing Director at Chatham Partners, in the announcement.

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According to Chatham, 77% of surveyed sponsors indicated that current disclosure levels are sufficient. However, only 58% of respondents feel confident about their understanding of their plan’s overall costs, despite realizing the importance of understanding these costs (79%).

Not only that, but sponsors are dissatisfied with the level of transparency offered by their existing providers, as evidenced by low scores given to fees being easy to compare to other providers (34%), revenue sharing disclosure (38%), and feetransparency (42%).

Size Differences

The results of the analysis also reveal perception differences depending on the size of the retirement plan. Sponsors of the largest plans (greater than $100 million in assets) have a deeper understanding of plan fees and place greater importance on understanding plan fees than sponsors of the smallest plans (less than $3 million in assets).

According to Chatham, there appears to be a connection between level of understanding and satisfaction levels, as larger plans are also considerably more satisfied with all fee attributes, most notably the total cost of the plan and good value for the money.

Additionally, there is variation between large and small plan sponsors over their concerns regarding fee transparency and disclosure. Specifically, plans with more than $100 million in assets are most concerned that lack of disclosure will lead to legal action by participants, while plans with less than $3 million in assets are most worried that lack of disclosure will lead to higher plan expenses.

The announcement saidthe vast majority of plan sponsors surveyed (74%) believe that participant fee disclosure is sufficient. However, it is clear that current disclosure efforts have not been entirely successful, as only 22% of plan sponsors report that participants are highly aware of the total cost to them.

Though few respondents indicate that fee transparency is the most important factor in their decisionmaking process, the vast majority of plan sponsors surveyed (81%) indicate that it plays an important role in the outcome of their selection of providers.

The 101-page report’s foundation is in-depth online surveys completed by 416 plan sponsors affiliated with corporate defined contribution plans ranging in size from $1 million in assets to more than $1 billion in assets.

More information is available at http://www.chathampartners.net/ .

Benefits March 13, 2008

Target-Date Mutual Funds a Sponsor Smash Hit for QDIAs

March 13, 2008 (PLANSPONSOR.com) - The latest Callan Associates study of the impact of the Pension Protection Act (PPA) provides yet another confirmation of the popularity of target-date funds.
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A Callan news release of about 90 large plan sponsors with a total of $120 billion in assets and more than two million participants, found that 79% of the plan sponsors preferred using a qualified default investment alternative (QDIA) (see Building a Better Default ) and target date funds are the QDIA of choice, particularly mutual funds.

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Some 49% of those offering or anticipating offering a target date or target risk fund as the QDIA will use a mutual fund structure, Callan said.

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Momentum Building

However, the Callan data showed momentum building for collective trusts and a customized mix of asset allocation funds. Eighteen percent of plan sponsors in the survey currently use or intend to use a custom mix of funds for their QDIA, up from 11% in Callan’s 2007 QDIA Survey, the announcement said.

“The movement towards customization within target date funds is likely attributable to new QDIA regulations that allow plan sponsors to manage a custom mix without being a registered investment adviser,” said Lori Lucas, DC practice leader at Callan Associates, in the news release. “It rewards large plan sponsors that have inexpensive DC cost structures and offer best-in-class DC funds for the benefit of plan participants.”

Callan also found that fee analysis and fee disclosure are priorities for plan sponsors in 2008. Forty-eight percent of respondent firms anticipate or will consider engaging in a fee analysis of their DC plan, compared to 23% who have no interest. Meanwhile, 32% of plan sponsors intend to voluntarily enhance fee disclosure.

Automatic Trends

The study also found that by the close of 2007, 44% of those surveyed offered auto enrollment with another 6% reporting they were likely to add it in 2008 – an increase from 35% at the end of 2006.

Finally, Callan found that a significant number of plans, 87%, do not offer a guaranteed income for life investment option and that most, 99%, were unlikely to offer it in 2008.

Callan said of the respondents in the latest poll 77% represent 401(k) plans; 11% are 401(a) and 6% are profit sharing plans. Forty-three percent qualify as “mega” plans worth more than $1 billion in assets and fewer than 17% have assets of less than $100 million.

More information is at http://www.callan.com/.

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