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What is retirement plan benchmarking?

Regular benchmarking can go a long way to protect a plan’s fiduciaries

INSIGHT ARTICLE

June 12, 2019 (Updated May 12, 2021)

According to the recent “How America Saves” report by Vanguard1, over 100 million Americans are participating in defined contribution retirement plans, and those plans have assets in excess of $8.8 trillion. With these kinds of numbers, it is no surprise that participant initiated litigation (in other words, employees suing their employer) of the management of the plan is escalating with rapid fervor. These lawsuits typically assert that the employer has breached its fiduciary duty to its employees by failing to monitor appropriately the fees paid from plan assets. Thus, allowing plan service providers to charge excessive investment and administrative fees.

An important factor into helping ensure your company’s defined contribution plan’s service provider fees are reasonable is to have those fees benchmarked on a regular basis. Benchmarking is the process of reviewing and evaluating a company’s retirement plan to see how the services and fees of its administrative services and investment managers compare with other plans 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 your plan design helps ensure your plan is competitive in attracting and retaining talent 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 advice, mobile access)? Consider whether your plan participants are receiving sufficient education to understand the plan and the investment options available.
  2. Investment platform—does your plan’s investment options provide sufficient diversification for your participants? Are appropriate asset classes being represented? Is there a process in place to monitor and review investments and investment performance?
  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 the expenses the plan is paying from its assets reasonable under the fiduciary rules? 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?

    The 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, to defray the reasonable costs of plan administration, and to diversify plan assets to avoid large losses, unless it is prudent under the circumstances not to. Among other duties, fiduciaries have a responsibility to ensure the services provided to their plan are necessary, and the cost of those services is reasonable.

    Plan sponsor and fiduciary best practices suggest plan sponsors benchmark their plans every three to five years to see how plan 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, market appreciation and changes in plan demographics. 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 are 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.

Benchmarking is an important record that supports a fiduciary’s procedural prudence in its selection and monitoring of plan service providers.

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. Using a live-bid process accounts for your plan’s specific demographics and characteristics. 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 negotiate either fee reductions or additional services with your current provider. The results may reveal it is time to look for another provider.

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

How America Saves 2020, The Vanguard Group, Inc.


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