As the Department of Labor hears from the retirement plan services industry this week during hearings into its proposed fiduciary rule, new research reveals many 401(k) plan sponsors are eyeing formal reviews of their plans, with many saying they are likely to switch providers.
Three-quarters of retirement plan sponsors say they are likely to initiate a formal review of their current 401(k) plan over the next 12 months, according to Cogent Wealth Reports. Of those, 15% say its highly likely they would switch providers and another 50% say its somewhat likely they would switch providers.
In its white paper, Navigating Change in the 401(k) Market: Key Insights for DC Plan Providers and Investment Managers, Cogent explored how plan sponsors are evaluating their 401(k) plans and their reasons for switching to a new provider. It surveyed plan sponsors of every size, from under $1 million in assets to more than $1 billion.
One-third of plan providers said they are certain they wont change plan providers in the coming year. The potential for plan turnover increased with the size of the plan.
When evaluating their plans, 55% of plan sponsors said the quality of investment options was their main criterion for making a switch. Forty-eight percent of plan sponsors cited plan administration fees and range of investment options as a main way to evaluate their plans and 46% said overall service quality for participants was most important.
The report found that just under half of all plan sponsors are most concerned about complying with regulations. Forty-seven percent of plan sponsors said their top priority was lowering plan costs and 45% plan to focus on re-evaluating the investment menu of their plan in the upcoming year.
Plan sponsors are more likely to consider switching retirement plan providers because of high administrative costs, the quality of investment options and plan investment fees.
Cogent also found that 59% of plans would likely drop or reduce their investment offerings from a particular investment manager in the next 12 months.
Investment team turnover, an issue that has plagued a handful of high-profile investment firms over the past year, is cited by 27%, while the desire to reduce fees and expenses is noted by 26%, Cogent said.
Fees are the primary reason that 41% of mega plans and 62% of small plans say they will drop a manager, while 23% of large plans cite concerns over organizational stability, the Cogent report found.
Cogent said that leaders in the retirement industry need to take heed. There are some new, smaller players in town that are becoming very competitive in the marketplace.
Interestingly, the aspect of strong brand recognition among participants, which has historically been the most important consideration driver, has diminished in importance this year, the report said. This is certainly welcome news for challenger firms that have been struggling to compete with the big-name brands in the industry, and ties back to the top criterion plan sponsors use to evaluate their providers, as well as our finding that having a well-respected brand is the top consideration driver for investment firms.
The white paper was derived from two separate online surveys of 401(k) plan sponsors in February and March 2015 and March and April 2015 by Cogent Reports.
Paula Aven Gladych is a freelance writer based in Denver.
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