The Value of Benchmarking a Retirement Plan

Steve Johnian, CPFA, AIF®
Steve Johnian, CPFA, AIF®

08.28.19 in The Retirement Plan Advisor

Estimated Reading Time: 6 Minutes (1028 words)

Retirement Plan Advisor

Although benchmarking a retirement plan is not mandated, there are key reasons why this best practice is important. ERISA requires plan fiduciaries to ensure that expenses are reasonable, so plan sponsors must monitor expenses to keep them in check and to ensure that the services provided are carried out effectively.

Plan sponsors also have a fiduciary duty to participants—they must ensure that all fees paid by the 401(k) are reasonable to protect the interests of plan participants, thus limiting fiduciary liability. The Department of Labor, however, does not define what is considered reasonable, so plan sponsors must make this determination, and benchmarking is a useful way to do so.

Accounting for Changing Needs

Benchmarking is like trading in a car. When we’re young, most of us buy an affordable, reliable car without the bells and whistles. As we get older, perhaps we land a new job with a long commute, so comfort is important—bring on that sunroof! A few years later, there’s a spouse and kids in the picture, so we need more space (an SUV, perhaps?) and safety, with a dropdown TV screen thrown in for good measure. The expense of that little detail is worth it, we think, because those car rides to Grandma and Grandpa’s are long and those kids aren’t going to nap. Likewise, the retirement plan an employer started with may not always fit what the company and plan participants need.

The problem (or the opportunity?) is just 19 percent of small to midsized employers are “very familiar” with their retirement plan fees, according to a 2018 survey by the Pew Charitable Trust. Many of these plan sponsors would rather leverage an expert, so they can focus on running their business. This is where advisors can add value—by offering to benchmark the plan and help ensure that costs, features, and compensation remain competitive.

Serving the Big Picture

With so much focus on fees, many plan sponsors tend to benchmark only plan costs, but the range and quality of services are also important. That luxury SUV is more expensive than your four-cylinder starter car, but does that make it a bad choice? The point of this process is to look at the whole picture, so you can make informed decisions about what the plan offers to employees and what may need updating for a better fit.

Plan costs and expenses. Because of market growth and ongoing contributions, most 401(k) plans are continually growing. As the retirement plan grows, the various costs involved may grow with it. Many service providers do not automatically adjust their fees. In some cases, the plan may outgrow its providers. Benchmarking a retirement plan can be a great way to help identify if the costs need to be renegotiated or even if you need to shop for new providers.

Advisor compensation. To ensure a retirement plan client remains profitable, understanding how to price yourself and your services is critical. It can also play a key role in the service model you offer. Like other plan costs, however, as the plan grows, so can your fee. Benchmarking advisor compensation can help advisors keep their fee competitive.

Plan design. You should consistently review plan design and features for opportunities for improvement. This can include the terms in the plan document, auto-enrollment and escalation, or Roth features. Let’s say you’re working with a technology company with a younger developing workforce. The 2018 PLANSPONSOR Defined Contribution Survey for plans in the technology, computers, and software industry shows that 82 percent of plans provide a Roth option, but this company’s plan doesn’t. Your recommendation to add such a feature could help position the firm’s benefits package more competitively.

Services. As a company continues to change and grow, so can the needs of the retirement plan. Companies often must make decisions about what services they need to support their business, so why should a retirement plan be any different?

For example, a 3(21) fiduciary makes investment recommendations to the plan sponsor, but ultimately the investment decisions fall on the plan sponsor. A 3(38) fiduciary assumes full control for the investment decisions, therefore offloading some of the plan sponsor’s fiduciary responsibility. Both services have different price points, with a 3(38) fiduciary typically carrying a greater cost. But if the plan sponsor is looking to offload the burden of making investment decisions, the cost may be justified.

A great way to support that decision is by looking at how the plan sponsor’s peers are using a 3(38) fiduciary and then sharing how you might offer this service as well. At Commonwealth, for example, advisors can opt to use our PlanAssist Investment Management platform. Through this 3(38) fiduciary service, Commonwealth assumes responsibility for retirement plan investment management, lifting the burden from the plan sponsor and allowing our advisors more time to serve clients and expand their business.

Mastering the Process

With so much to consider, breaking down the process of benchmarking a retirement plan into steps can keep you organized and shape your approach. Give the following a try:

  1. Start with why or when you might benchmark a plan. Benchmarking every few years is a best practice. Or, perhaps plan sponsors need to address a milestone, need, or concern, such as plan growth, additional fiduciary protection, or subpar service from a provider.

  2. Outline what components you want to look at. Do you want to benchmark everything or only specific elements?

  3. Then, determine where you will get the data to benchmark. There are many different tools and resources for this, including the following:

    • BrightScope benchmarks a plan’s costs and design features against plans of similar size and demographics.
    • Fi360’s Fee Benchmarker compares and evaluates advisor fee and service trends, as well as current market data.
    • Fiduciary Benchmarks offers a comprehensive apples-to-apples comparison that examines the number of services provided to a plan and how well those services meet industry standards.

  4. Review your findings with the plan sponsor and determine whether you need to make a change, consider other options, or do nothing.

  5. Document this process, your findings, and actions you will take, and maintain the information in the plan’s fiduciary file.

A Helping Hand

Like buying a car, benchmarking a retirement plan takes time, thoughtful consideration of expenses, and an understanding of the needs of the “buyer.” By breaking down the process into steps, you can help plan sponsors understand how their plans measure up to others in their industry while helping to ensure that they are fulfilling their fiduciary responsibilities to the plan and its participants.

This material is for educational purposes only and is not intended to provide specific advice.

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