Benchmark Retirement Plans to Reduce Risk and Advance Outcomes

 

Regarding your company’s retirement plan, when was the last time you evaluated your service providers? Do you fully understand all of the fees being charged in your plan? How do your plan’s eligibility requirements, matching contributions and vesting provisions compare to the competition? Are you effectively communicating the benefits of the retirement plan to your employees?

 

If you are the sponsor of a retirement plan and are having difficulty answering any of these questions, it may be time to have an independent retirement plan expert review what you are offering.

Why Benchmarking is Important

It is recommended that you benchmark your plan every three years, according to the Department of Labor. Industry best practices advise reviewing it every year because of lawsuits and regulations.

 

Reasons for benchmarking your retirement plan include:

• Protecting employees’ assets.
• Fiduciary responsibility.
• Ensure only reasonable fees are paid.

 

Employers that fail to do this can be held liable for plan mismanagement.

Evaluating Fees and Expenses

In a defined contribution plan (401(k) or 403(b) plan), an employee's account balance determines the amount of retirement income they will generate in retirement. Fees and expenses can dramatically reduce that amount.

 

Effective fee management is a critical component in maximizing retirement readiness. As little as 20 basis points (0.20%) in excess fees could reduce the payout of retirement benefits by as much as $300,000 over an employee’s lifetime.[1]

 

Reduced savings may also impact employees' ability to retire on their own terms. The cost of delayed retirement can impact the employer as well. A study by Prudential found that a one­-year delay in retirement for an individual can cost an employer roughly $50,000.

 

Here are the categories of 401(k) plan fees you should be evaluating on a regular basis:

 

Plan recordkeeping/administration fees: The day-to-day operation of a 401(k) plan involves expenses for basic and necessary administrative services, such as participant recordkeeping, plan documents, compliance, accounting and trustee services. A 401(k) plan also may offer a host of additional services, such as voice-response systems, access to customer service representatives and online transactions.

 

In some instances, administrative service costs are covered by investment fees that are deducted directly from investment returns. Otherwise, if administrative costs are separately charged, they will be borne either by your employer or charged directly against the assets of the plan.

 

Investment expenses: Charges for investment management and other investment-related services are usually assessed as a percentage of assets invested, which the employee pays. The net total return of the investment is the return after these charges are subtracted.

 

Investment advisory fees: Numerous retirement plan sponsors hire an independent investment advisor or a consultant to help with the selection and monitoring of the plan's investments. Fees for the investment advisor can be paid directly by the employer or as a percentage of plan assets.

 

Individual service fees: In addition to administrative expenses, there may be individual service fees associated with optional features offered in a 401(k) plan. Individual service fees are charged separately to participants’ accounts who choose to utilize a particular plan feature. Individual service fees may be charged to a contributor for taking a loan or a distribution from the plan, for example.

Evaluating Investment Performance

When it comes to benchmarking a retirement plan's investment performance, many plan sponsors will appoint at least some of the investment selection and monitoring responsibilities to an advisor or consultant. Having a documented and repeatable process for evaluating your plan's investment options is critical for your fiduciary obligations. A best practice is to use an investment policy statement (IPS) to serve as a decision-making blueprint.

 

Another option is to outsource the investment selection, monitoring and replacement process. Plan sponsors should independently review and identify the best funds available in each asset class.

Other Areas to Evaluate

Fees and investment performance are critical components of benchmarking your plan, but it is also important to evaluate other areas of your retirement program. You should also look at the following areas:

 

Plan design: A plan should be molded to meet the plan sponsor’s goals and objectives. Some plans are designed to give a company an edge in retaining and attracting talent. Matching contributions, profit sharing and immediate eligibility and vesting are provisions that will decide if a plan stands out from the competition. Other plans are designed with the objective of allowing owners and key employees the ability to maximize their contributions and tax deductions.

 

Service providers: There are many factors beyond cost that go into evaluating and hiring the right service provider. Some put a premium on delivering high-touch service, others focus more on delivering superior technology, while some combine those elements. Services that stand out include a dedicated account manager, on-site enrollment support, the ability to deliver employee notices, payroll integration capabilities and online educational tools. Also, conducting a request for proposal process every three to five years is a prudent practice.

 

Communication: Effective communication and education programs focused on driving successful participant outcomes are important. Communications should educate and guide participants, ensuring they have a clear understanding of how to reach their financial goals.

In Summary

When done well, regular benchmarking of your retirement plan will keep you well equipped to determine if your current retirement program is meeting your company's retirement goals, and whether the plan's expenses are in line with the market. Having a documented, ongoing fiduciary process is an essential part in meeting your fiduciary obligations and operating a successful plan.

 

As always, reach out to your 1834 team with any questions.

 

[1] Mercer Defined contribution plan fee practices: Assumes employee starts career at age 25, retires at age 65, starting pay of $40,000, annual pay increases of 2.5%, employee plus employer annual contributions of 10% of pay, investment return of 7%pre-retirement and 5% post-retirement, and initial annual retirement withdrawal of 4% of balance increased by 2.5% each year for inflation.

 

CITATIONS:

www.callan.com/blog-archive/2020-dc-trends-survey/

www.prudential.com/corporate-insights/employers-should-care-cost-delayed-retirements

www.plansponsor.com/minority-401k-plan-sponsors-measure-retirement-readiness-benchmark-plan-success/