Is your retirement plan sitting on the bench?
INSIGHT ARTICLE |
According to the “How America Saves 2015” report by Vanguard, over 90 million Americans are covered by 401(k)-type retirement plans, with assets in excess of $6.5 trillion. With these kind of numbers, it’s no surprise that the U.S. government is concerned about people getting a good deal on their 401(k) plan.
In an attempt to get clear information about 401(k) costs to employers and employees, the U.S. Department of Labor (DOL) handed down new fee disclosure regulations in July 2012. These regulations require retirement plan service providers to disclose comprehensive information about their services and fees. Now that these regulations are nearly four years old, are employers and employees better educated about the fees in their 401(k) plan?
Largely, the answer is no. Most employers and employees still do not know what their 401(k) plan costs. Oftentimes, this is because most, or all fees are automatically deducted from the investment balances before the return is calculated. In this situation, line items for administration, record keeping or advisory fees are not visible.
The answer to how much these services cost can be hard to find. Usually, it is difficult to know a plan’s true costs, without doing some digging. That is where benchmarking comes in. Properly benchmarking a 401(k) plan allows an employer to see the plan costs and determine if the fees are reasonable.
The value of a benchmarking report
How do you go about benchmarking a retirement plan? What determines if a plan’s fees are reasonable? To answer these questions, the DOL recommends employers survey the marketplace by getting bids that are customized to the company’s plan demographics from competing retirement plan providers. With this information, an employer can compare its current plan fees and services to what is available in the marketplace.
Keep in mind the DOL does not expect you to consider fees in a vacuum, selecting the lowest costs possible. Costs are only one part of the bigger picture. Investment risk and returns, and the extent and quality of services provided, should also be considered. Also be sure to analyze and determine if employees are on track to meet income replacement goals.
Last year, the U.S. Supreme Court ruled employers have a duty to “continuously monitor” retirement plan investments and fees. This is best accomplished by having a plan committee that meets regularly to address regulatory responsibilities and creates documentation of adherence and decision-making processes.
If you don’t have the in-house expertise, or the time to perform such an in-depth analysis, the DOL recommends employers seek out expert assistance. How do you identify an expert? The advisor or consultant should be well-versed in the Employer Retirement Income Security Act of 1974 and all of its many updates, the ever-changing retirement plan provider landscape, as well as the latest trends in retirement plan design.
A key question to ask is: What percentage of your business is derived from employer retirement plans? Look for advisors who devote 60 to 100 percent of their practice to employer retirement plans.
If it has been more than three or four years since your organization has benchmarked its retirement plan by getting “live bids” from the marketplace, put it on your agenda to do so this year. Then, be sure to repeat the process every three to four years. In between benchmarkings, be sure to document the continuous monitoring of your plan’s investments and expenses.
To learn more, watch our recent webcast, Plan benchmarking: Why is it important to evaluate your plan? and download the presentation slides.