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What is retirement plan benchmarking?

INSIGHT ARTICLE  | 

According to the recent “How America Saves” report by Vanguard[1], over 97 million Americans are covered by defined contribution retirement plans, with assets in excess of $7.5 trillion. With these kind of numbers, it is no surprise defined contribution litigation is escalating with rapid fervor.  One of the reasons these lawsuits are being filed is due to excessive fees.

One method to help ensure your company’s defined contribution plan’s fees are reasonable is to have it benchmarked on a regular basis. Benchmarking is the process of reviewing and evaluating a company retirement plan to see how it compares with others of a similar size or type.

Benchmarking your plan is a good way to keep your current service providers in check and see how your services and fees compare. In addition, benchmarking helps ensure your plan is competitive and is providing value to your company and your employees.

There are three main areas to focus on when reviewing your retirement plan:

  1. Provider services and technology—What plan features and benefits are being offered to plan participants (automatic enrollment, retirement plan calculators, student debt management, financial wellness programs, personalized retirement plans, mobile access)?  Consider whether your plan participants are receiving sufficient education to understand their plan and the investment options available.
  2. Investment platform—Do your plan’s investment options provide sufficient diversification for your plan participants?  Are appropriate asset classes being represented?  Is there a process in place to monitor and review investments and investment performance? and help you mitigate fiduciary risk?
  3. Fees—As a fiduciary, do you completely understand the plan fees and expenses of your retirement plan?  What expenses are being paid by the plan?  What expenses are being paid by the plan sponsor?  Are these expenses reasonable?  How do they compare with similarly sized plans?

Why benchmark a retirement plan?

Below are the key findings a benchmarking study can provide you and those who serve as fiduciaries of your company’s defined benefit plan:

  • Are you meeting your fiduciary responsibilities?

Employee Retirement Income Security Act (ERISA) requires fiduciaries to carry out their responsibilities prudently and solely in the best interest of the plan’s participants and beneficiaries. Among other duties, fiduciaries have a responsibility to ensure the services provided to their plan are necessary and the costs of those services is reasonable.

Plan sponsor and fiduciary best practices suggest plan sponsors benchmark their plan every three to five years to see how their services and pricing stack up. A well-priced and well-serviced plan ultimately benefits plan participants and helps minimize fiduciary liability risk for the employer.

  • Is it time to adjust fees?

Most retirement plans grow over time through participant and employer contributions and market     appreciation. Too often, service providers do not adjust fees to account for this growth. 

  • How is your investment platform performing compared to others?

Monitoring a retirement plan’s investments is an important fiduciary responsibility. Investment performance should be reviewed at least annually, and conducting quarterly reviews is a best practice.  Benchmarking provides an opportunity to review the level of fiduciary services for your plan, investment performance data and investment fees.

  • Does the plan’s design still meet your specific requirements?

Benchmarking and reviewing your plan is a great time to also examine if updates are needed to your plan document, plan structure and plan design. Employers may find ways to increase participation like auto enrollment and auto escalation.

Who should benchmark a retirement plan?

Although your company’s retirement plan committee might undertake the project of evaluating the reasonableness of fees without assistance from a qualified professional, courts tend to agree that it is a ‘best practice’ to work with a knowledgeable, independent advisor.

An independent retirement plan specialist can provide an efficient and objective process to understand and review plan services and fees. By using a live bid process, your plan’s specific demographics and characteristics are accounted for in the benchmarking process. Data points in key areas including recordkeeping, investment management, compliance services, employee education, and technology, should be compared.

With the results of the benchmarking exercise, you will know whether your plan fees are reasonable and if your provider’s services are competitive. Also, you are now in position to either negotiate fee reductions or additional services with your current provider. The results may reveal it’s time to look for another provider.

The process of regular benchmarking of retirement plan costs and performance can go a long way to protect a plan’s fiduciaries and participants as well as help plan sponsors stay abreast of industry trends.         

[1] How America Saves 2018: Telling the retirement story with data, The Vanguard Group, Inc.


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