Decline in NQDC Investment Fees Creates Opportunity to Reduce Costs to Participants
David J. Marshall
According to data from the Investment Company Institute, the average mutual fund fee for 401(k) participants dropped from 77 basis points to 48 basis points from 2000-2016. Until recently though, progress in this area had not been made with nonqualified plans. This has been the case, in part, because NQDC menus are often designed by plan recordkeepers that are incentivized to attract high-fee assets to fund the plan, not solely to create menus that best serve plan sponsors and their participants.
Recently, however, the trend of lower investment fees in qualified plans has spread to nonqualified plans as well. Some companies are reducing fees in their nonqualified plans simply by using the same menu for their nonqualified plans that they use for their qualified plans. Others are designing lower-fee menus specifically for their nonqualified plans.
Atlas recently worked with a client to optimize the company’s NQDC plan menu. The initial menu offered a diverse selection of asset classes and fund managers, and the fees were already relatively low (an average of 19 bps), but the company wanted to explore whether it could reduce fees further. We thought it would present an interesting case study. Specifically, what kind of benefit could be realized for participants, even when a menu already has fairly low fees?
The new menu that we designed for this client reduced the already low investment fees by 63%, to an average of 7 bps. Over the last 5 years, the annualized return (net of fees) of the new menu was 7.45%, versus 6.66% for the old menu. The most significant changes included replacing an iShares MSCI emerging markets equity fund with an SPDR emerging markets equity fund (reducing the fee from 69 bps to 11 bps, and increasing the annual return, net of fees, by 0.73% over the last 5 years). Two foreign fixed income funds with fees of about 40 bps were also replaced with a Vanguard foreign fixed income fund with 11 bps of fees and 1.46% higher annual returns net of fees over the past 5 years. The fee on the aggressive model portfolio in the menu was also reduced by 72%.
This menu redesign will significantly enhance retirement outcomes for participants and highlights the opportunity that exists for plan sponsors to reduce fees for executives, even when menus already have low fees. Atlas would be happy to assist plan sponsors in evaluating their menus.