Many employers are reviewing and enhancing their 401(k) plan in an effort to boost their employees' financial well-being, as well as provide a competitive benefit for recruitment and retention. Have you ever wondered how your 401(k) plan measures up against comparable plans? Are you searching for a way to measure the success of your 401(k) plan?
We know that effectively benchmarking your retirement plan can be challenging and time-consuming, but regularly benchmarking your plan can help ensure that your company's 401(k) plan is both competitive and compliant with regulatory standards. In this blog post, we'll explore why conducting a comprehensive benchmarking of your 401(k) plan can improve your plan, lower your fees and mitigate fiduciary liability.
Understanding the basics of 401(k) plan benchmarking can quickly become overwhelming to employers. The key purpose of understanding benchmarking is to help create a better retirement plan for all those involved. Benchmarking allows employers to view areas of improvement by comparing their 401(k) plan with the industry standards. This comparison provides measurable data such as plan design, fees, investments, and services. It involves looking at what you are offering your employees today and deciding if it’s appropriate or needs some updating.
Benchmarking Plan Design
Benchmarking 401(k) plan design is an important process for plan sponsors to ensure that their plan is competitive and provides value to participants. By comparing their plan design to industry standards and best practices, plan sponsors can identify opportunities to improve the plan's features and offerings, which can help attract and retain employees and increase participation and savings rates.
Here are some key factors to consider when benchmarking 401(k) plan design:
- Plan Type: There are several types of 401(k) plans, including traditional 401(k) plans, safe harbor 401(k) plans, and automatic enrollment 401(k) plans. Each type has different requirements and features, and plan sponsors should benchmark their plan type to ensure that it is appropriate for their organization and provides value to participants.
- Plan Match: A plan match is an employer contribution that matches a portion of an employee's contribution to the plan. Benchmarking plan matches can help plan sponsors ensure that their match is competitive and provides value to participants.
- Plan Vesting: Plan vesting determines when an employee's contributions and employer match become fully vested or owned by the employee. Benchmarking plan vesting can help plan sponsors ensure that their vesting schedule is competitive and provides value to participants.
- Plan Investment Options: Plan investment options include a variety of investment choices, such as mutual funds, collective investment trusts (CITs), stable value and target-date funds. Benchmarking plan investment options can help plan sponsors ensure that their investment options are diverse, appropriate for their participants' needs, and competitively priced.
- Plan Fees: Plan fees are the costs associated with administering and managing the plan, including administrative fees, investment fees, and advisor fees. Benchmarking plan fees can help plan sponsors ensure that their fees are reasonable and competitive compared to industry standards.
- Plan Communication and Education: Plan communication and education include providing participants with information about the plan's features, investment options, and retirement savings goals. Benchmarking plan communication and education can help plan sponsors ensure that their participants are well-informed about the plan and motivated to participate and save for retirement.
Benchmarking your current plan design to other companies within your industry will provide valuable data to help you make changes in your 401(k) plan to be more competitive and help employees achieve better retirement outcomes.
401(k) Plan Fee Benchmarking
Over time 401(k) assets grow with contributions and market appreciation and it's important to ensure that your 401(k) plan fees are in line with industry averages. One key component of assessing the value of a 401(k) plan is benchmarking the fees associated with the plan.
Benchmarking fees is the process of comparing the fees of a 401(k) plan to those of other plans in the market. This helps employers determine whether the fees they are paying are reasonable and whether they are getting a good deal for their employees.
Several different fees may be associated with a 401(k) plan, including investment fees, administrative fees, record-keeping fees, and advisor consultant fees. These fees can add up quickly and have a significant impact on the amount of money that employees are able to save for retirement.
To benchmark 401(k) plan fees, employers should start by gathering information on the fees that are associated with their plan. This may involve reviewing plan documents, talking to the plan administrator or investment advisor, and reviewing fee disclosures.
Once employers have a clear understanding of the fees associated with their plan, they can begin comparing those fees to other plans in the market. This may involve researching fees for similar plans offered by other companies or consulting with industry experts who specialize in benchmarking fees.
When benchmarking fees, it's important to consider both the absolute dollar amount of the fees as well as the percentage of assets that the fees represent. For example, a plan with higher fees may still be a good value if it offers fiduciary support, superior investment options, or record-keeping services.
Types of Fees Associated with 401(k) Plans
401(k) plan fees can be broken down into three categories: administrative fees, investment fees and advisory consulting fees.
Administrative fees are fees charged by the plan provider for services such as recordkeeping, compliance, and participant education. These fees can be charged as a flat dollar amount, a percentage of assets, or a combination of the two.
Investment fees are fees associated with the investments offered in the plan, such as mutual fund expense ratios or brokerage fees. These fees are typically a percentage of assets and are paid by plan participants.
Advisor consultant fees are fees that a plan sponsor pays to an advisor or consultant to provide services related to the plan design, investment advisory, plan governance, vendor management and participant education services. These fees can vary depending on the type of services provided, the size of the plan, and the advisor’s level of experience and expertise.
To benchmark 401(k) plan fees, plan sponsors should compare their plan's fees to those of similar plans. This can be done by working with an employer sponsored 401(k) consultant or using benchmarking tools provided by plan providers or industry associations. When comparing fees, it is important to consider the level of services provided, as well as any additional fees charged for optional services.
Ultimately, the goal of benchmarking 401(k) plan fees is to ensure that employers are providing their employees with a cost-effective and valuable retirement savings vehicle. By carefully evaluating the fees associated with their plan and comparing them to those of other plans in the market; employers can make informed decisions and provide their employees with the best possible retirement benefits and mitigate fiduciary liability.
Fiduciary Liability and the Importance of Benchmarking Plan Fees
Offering a competitive 401(k) plan is a significant factor in recruiting and retaining valued employees. As a plan sponsor, it is essential to understand the fees associated with the plan, as well as the responsibilities and potential liabilities that come with being a fiduciary. Benchmarking 401(k) plan fees can help mitigate these fiduciary liabilities and ensure that plan fees are reasonable and appropriate.
As a plan sponsor, you have a fiduciary responsibility to act in the best interests of plan participants. This includes ensuring that plan fees are reasonable and appropriate for the services provided. If plan fees are excessive, it can have a significant impact on participants' retirement savings, and it can also expose the plan sponsor to potential lawsuits and penalties.
To help mitigate these risks, it is important to benchmark plan fees regularly. Benchmarking involves comparing your plan's fees to similar plans to determine whether your fees are reasonable and competitive. By benchmarking your plan fees, you can ensure that your plan is providing value to participants while also fulfilling your fiduciary obligations.
The Department of Labor (DOL) recommends that plan sponsors should conduct a periodic review of their 401(k) plan, including benchmarking, at least once every three years to ensure that the plan continues to operate in the best interests of plan participants. However, many experts suggest that plan sponsors should benchmark their plan more frequently to reduce fiduciary liability and ensure that the plan remains competitive.
In 2021, there were over 125 new Employee Retirement Income Security Act (ERISA) class action lawsuits filed, with an average settlement of $12 million. ERISA class action lawsuits are typically brought by plan participants or beneficiaries against plan sponsors, alleging breaches of fiduciary duty.
These lawsuits often focus on claims related to plan fees, investment options, and plan administration. For example, plan participants may allege that plan sponsors failed to monitor and control plan fees, offer appropriate investment options, or prudently manage plan assets.
The high number of ERISA class action lawsuits and the large settlements underscore the importance of plan sponsors fulfilling their fiduciary responsibilities and taking steps to mitigate potential liability. Conducting regular 401(k) plan benchmarking can help plan sponsors identify areas that need improvement and take corrective actions to reduce potential liability.
Benchmarking 401(k) plan fees is an essential part of fulfilling fiduciary responsibilities and ensuring that plan fees are reasonable and appropriate. By benchmarking administrative and investment fees regularly, plan sponsors can demonstrate prudence, identify cost-saving opportunities, and mitigate legal and financial risks. Working with a 401(k) plan consultant or using benchmarking tools provided by plan providers or industry associations can help plan sponsors navigate this process and ensure that their plan is providing value to participants.
If you would like to discuss our retirement plan benchmarking process for your firm, please reach our Retirement Plan Consultant, Tom Mantych, at tmantych@cgofinancial.com
Thank you for reading.
This article was written by Tom Mantych, Retirement Plan Consultant at Connor & Gallagher OneSource (CGO)
Tom assists employers to navigate the complexities and regulations related to their corporate retirement plans. He holds the designations of Charter Retirement Plan Specialist, (CRPS) from the College of Financial Planning and Retirement Income Certified Professional, (RICP) from the American College of Financial Services. Tom brings over 25 years of experience.
This blog is for educational and/or informational purposes only and does not constitute legal advice.
