Defined Benefit Expense Survey
Initial Fielding Period Results
Introduction
1
Penbridge Advisors, in cooperation with Institutional Investor Journals, recently concluded the initial fielding period of the first survey to capture all the
costs associated with maintaining a U.S. corporate defined benefit (DB) plan. Our objective in conducting the survey is to gain insight into the costs
plan sponsors incur to maintain their DB plan, whether paid by the plan or directly by the plan sponsor. The survey results are being used to provide
respondents with a customized DB Expense Benchmarks Report as part of Penbridge’s initiative to help plan sponsors make informed decisions involving
the cost of maintaining their DB plan.
Set up as a rolling survey, the initial findings summarized in this report are based on 23 plans. These plans represent a broad variety of plan types and
sizes. An aggregate profile of the respondents is shown on Page 3. We want to acknowledge and thank the pioneering plan sponsors that participated in
the initial survey.
Penbridge is seeking to increase plan sponsor participation in the survey. Plan sponsors that participate receive, at no charge, a customized Penbridge DB
Expense Benchmarks Report as described on the last page.
Survey Methodology
For each participating plan sponsor, the survey was designed to capture plan expenses for a single U.S. DB plan. For companies with multiple U.S. plans,
it was each respondent’s choice to complete the survey for each of their plans or for the largest plan(s). To date, 22 plan sponsors representing $52 billion
in plan assets have completed the survey, one of whom completed the survey for two plans, resulting in 23 completed surveys.
The survey addressed the full range of DB plan expense categories including in-house and external provider
expenses as well as expenses that are recurring and non-recurring. The survey also asked respondents to
approximate the percentage of expenses paid by the plan for each expense category.1 The results sometimes
varied significantly depending on whether the analysis was done on an unweighted basis (i.e. based on the
number of plans) or on a weighted basis (i.e. based on plan assets).
To participate in the
Penbridge Defined Benefit
Not all questions were answered by all respondents. To aggregate the results, responses of ‘NA’ were treated as
zero expense. In the few cases where the respondent could not supply an answer, we excluded the non-response
from the analysis. We have indicated the number of responses (n) received to each of the questions (max = 23).
Expense Survey, please visit
www.penbridgeadvisors.com
Survey Findings
• Most plan’s total expense ratios are between 0.50% and 1.50% – The chart below shows the total expense ratio by plan size for each of the
plans that participated in the initial survey. The average expense ratio for all plans was 0.97%. But on a weighted basis (i.e. based on plan assets), the
average expense ratio was 0.73%, indicating that larger plans operate more efficiently.
Total Expense Ratio by Plan Size (n=21)²
3.00%
Total Expense Ratio
2.50%
2.00%
1.50%
1.00%
0.50%
0.00%
$10M
$100M
$1B
$10B
$100B
Plan Assets
1
Department of Labor regulations under ERISA section 408(b)(2) require plan fiduciaries to obtain disclosures of fees paid by the plan, and further require that all such fees be reasonable.
2
Total Expense Ratio is defined as total DB plan expenses divided by assets. Excludes survey respondents that did not supply a response for all expense categories. Responses of ‘NA’ were treated as zero expense.
Defined Benefit Expense Survey
Initial Fielding Period Results
• Investment Management is the largest expense – Not surprisingly, the largest plan expenses collected in the survey were attributed to investment
management. On a weighted average basis investment management expenses were even higher than on an unweighted average basis. This reflects
relatively higher investment expenses by the larger plan sponsors, most likely due to their higher allocation to alternatives and their higher use of
active management. PBGC premiums and administration were the next largest expense categories.
Average Expense Ratio by Category3
Trust and Custody (n=23)
Administration (n=23)
Actuarial (n=23)
Investment Management (n=22)
Investment Advisory - Non-Discretionary (n=23)
Unweighted
Investment Advisory - Discretionary (n=23)
Total PBGC Premium (n=23)
Weighted
Legal (n=22)
Plan Audit (n=22)
Insurance (operational) (n=22)
Other (n=22)
Total (n=21)
0.00%
0.20%
0.40%
0.60%
0.80%
1.00%
• Source of payments varies widely – Survey respondents identified both plan assets and direct payment from plan sponsor as significant sources
of payment for each plan expense category. These findings indicate that a complete view of a DB plan’s expenses is not available on a Form 5500.
Interestingly, in every expense category there are some plan sponsors who pay those expenses entirely from plan assets, and there are some who do
not use plan assets at all. Relatively few expenses are paid partially from plan assets.
Source of Payment for Plan Expenses
Trust and Custody (n=19)
Administration (n=21)
Actuarial (n=22)
Investment Management (n=21)
100% Paid by the Plan
Investment Advisory - Non-Discretionary (n=13)
Partially Paid by the Plan
Investment Advisory - Discretionary (n=6)
Total PBGC Premium (n=22)
0% Paid by the Plan
Legal (n=19)
Plan Audit (n=20)
Insurance (operational) (n=11)
Other (n=5)
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
• In-house pension management resources are constrained – The average full-time equivalent (FTE) headcount devoted to U.S. DB plan
management for all plan sponsors that participated in the survey was 2.5. This compares to 3.8 for plans more than $1 billion, 2.1 for plans $100
million to $1 billion and 1.8 for plans less than $100 million. Anecdotally, sponsors across the size spectrum communicated an ability to focus only on
the highest priority activities.
Average Full-time Equivalent (FTE) Headcount Devoted to U.S. DB Plan Management (n=22)
All Plans
More than $1 billion
$100 million - $1 billion
Less than $100 million
0.0
3
0.5
1.0
1.5
2.0
Detailed descriptions of the expense categories are provided to respondents in the Defined Benefit Expense Survey.
2.5
3.0
3.5
4.0
2
Defined Benefit Expense Survey
Initial Fielding Period Results
Other Observations
3
• Benchmarking plan expenses is a complex exercise – We worked collaboratively with many plan sponsors to improve the accuracy and consistency
of their expense data in spite of complicating issues, e.g. internal access to information, the high number of vendors and varying fee arrangements,
potential lack of transparency on all fees, whether fees are paid inside or outside the plan, difficulty of quantifying internal resource time/cost, etc.
• Overall improvement in plan governance – Many of the plan sponsors that participated in the survey acknowledged the time spent completing the
survey was extremely valuable in enhancing their benchmarking efforts, identifying potential cost savings, and improving overall plan governance.
Profile of Respondents
The information below describes the characteristics of the respondents to the survey during the initial fielding period and provides a context for
understanding the results.4
Plan Asset Size (n=23)
Plan’s Type of Benefit Formula (n=23)
13%
30%
Final average pay
Less than $100 million
30%
$100 million – $1 billion
Career average
48%
26%
Cash balance
More than $1 billion
40%
Other
13%
Current Plan Status (n=23)
35%
43%
22%
Plan Demographics (n=23)
Open to new entrants, and continuing
to accrue benefits
16%
Closed to new entrants, but continuing
to accrue benefits for existing
participants
Retirees
35%
14%
Terminated Vesteds
Actives Accruing
Actives Non-Accruing
35%
Frozen; no longer accruing benefits
Average Asset Allocation (n=23)
Domestic Equities
International Equities
Short Duration U.S. Fixed Income
Interm. Duration U.S. Fixed Income
Unweighted
Long Duration U.S. Fixed Income
International Fixed Income
Weighted
High Yield Fixed Income
Alternatives
Cash
Other
0%
5%
10%
15%
20%
25%
30%
35%
Average Management Style (n=23)
Unweighted
Active Management
Passive Management
0%
4
Weighted
20%
40%
60%
80%
100%
Life insurance companies represented 4 of the 23 respondents. All of them had significantly lower expenses in certain categories such as investment management and administration. This should not be
surprising, given the nature of their companies and internal resources. But, it probably did skew the expense averages down a bit (we estimate by about 10%).
Defined Benefit Expense Survey
Initial Fielding Period Results
DB Expense Benchmarks Reports
A Penbridge DB Expense Benchmarks Report allows plan sponsors and fiduciaries to compare
the expenses of their plans with those of other plans that participate in the Penbridge Defined
Benefit Expense Survey. Shown below is a sample Benchmarks Report for a hypothetical
respondent (shown here as ‘XYZ Company’). The Benchmarks Report includes several types of
analysis as follows: (1) a scatter chart showing how the plan’s total expense ratio compares
with those of other plans by plan size, (2) a bar chart showing how the plan’s expenses by
category compare to the average expenses for participating plans (on both a weighted and
unweighted basis) and (3) a percentile analysis showing how each category of the plan’s
expenses ranks relative to other plans with expenses in the same category. The Report will
also show how the plan’s characteristics compare to those of other survey respondents,
providing additional context for interpretation of the results.
“
Benchmarks Reports can
identify areas where plan sponsors
may want to look for better efficiency
in the operation of their plans.
DB Expense Benchmarks Report
Expense Ratio by Category3
1
Respondent Information
DB Plan Information
John Smith
Plan Name
XYZ Company Pension Plan
Title
Pension Plan Manager
Plan Assets
$3,256,522,000
Company
XYZ Company
Plan Liabilites (PBO)
$3,223,478,000
Phone
800-123-4567
Reporting Period
01/01/2013 – 12/31/2013
Email
[email protected]
Survey Completion Date
12/08/2014
Expense Ratio
0.80%
DB Plan Expenses by Category1
Category
DB Plan
Expenses
Category
DB Plan
Expenses
a. Trust and Custody
$370,000
g. Total PBGC Premium
$7,321,000
$5,007,000
$588,000
c. Actuarial
$18,522,000
d. Investment Management
e. Investment Advisory - Non-Discretionary
$96,000
NA
f. Investment Advisory - Discretionary
2
1.00%
Name
b. Administration
”
Steve Keating
Co-Founder and Principal
Penbridge Advisors
DB Expense Benchmarks Report
Plan Sponsor Profile
4
0.60%
0.40%
0.20%
NA
h. Legal
0.00%
Total DB Plan
Expenses
(n=21)
$100,000
i. Plan Audit
NA
j. Insurance (operational)
Trust and Custody
(n=23)
XYZ Company
NA
k. Other
Total
Administration
(n=23)
Actuarial
(n=23)
Investment
Management
(n=22)
Unweighted Average
Investment Advisory
– Non-Discretionary
(n=23)
Total PBGC
Premium
(n=23)
Plan Audit
(n=22)
Total PBGC
Premium
(n=23)
Plan Audit
(n=21)
Weighted Average
Percentile Ranking by Category4
$32,004,000
100%
Total Expense Ratio by Plan Size (n=21)2
3.00%
75%
Percentile Ranking
Total Expense Ratio
2.50%
2.00%
1.50%
50%
25%
1.00%
XYZ Company
0.50%
0.00%
$10M
0%
$100M
$1B
$10B
Total DB Plan
Expenses
(n=21)
$100B
Plan Assets
Trust and Custody
(n=18)
Administration
(n=22)
Actuarial
(n=23)
Investment
Management
(n=21)
Investment Advisory
– Non-Discretionary
(n=12)
XYZ Company
1
XYZ Company responses to Penbridge Defined Benefit Expense Survey.
3
Shows only categories for which XYZ Company provided a non-zero response. Survey averages include responses of ‘NA’, which were treated as zero expense.
2
Total Expense Ratio is defined as total DB plan expenses divided by assets. Excludes survey respondents that did not supply a response for all expense categories. Responses of ‘NA’ were treated as zero expense.
4
Shows only categories for which XYZ Company provided a non-zero response. Excludes survey responses of ‘NA’ or zero expense.
We look forward to additional plan sponsor participation in the Penbridge Defined Benefit Expense Survey. As more sponsors participate, we intend to
refine the benchmarking process by creating specific benchmark groups. If you have questions about the initial fielding period survey results or the
Benchmarks Reports, please contact us. To participate in the survey, please visit www.penbridgeadvisors.com.
Contact Us
Steve Keating, Principal
Robert Goldbloom, Principal
T: 203-955-1566
T: 914-486-0501
E: [email protected]: [email protected]
© Copyright Penbridge Advisors, LLC May 2015