As a retirement plan sponsor, you’re entrusted with helping your employees secure their financial future. In fact, under ERISA, you’re legally obligated to act in the best interests of plan participants. This includes ensuring the plan meets their needs, and operates prudently. But in today’s ever-changing economic landscape, how can you be sure your plan is truly serving their best interests? The answer lies in benchmarking.
Best Interests of Participants?
It’s, of course, not in the best interest of participants to pay higher than average fees for the retirement plan. Ditto, receiving subpar services. Fees and services are examples of why periodic benchmarking is critical. Think of benchmarking as a check-up for the retirement plan, allowing you to compare its costs, performance and features against similar plans. This crucial process, a key component of your fiduciary duty, helps you identify areas where your plan excels and, perhaps more importantly, areas where it might be falling short. Without benchmarking, you’re essentially flying blind, potentially leaving your employees with a plan that is not competitive or cost-effective—and, you are opening yourself up to legal liabilities, for which you can be held personally responsible.
Benchmarking involves a thorough evaluation of key plan components. This includes comparing investment options like fees and performance to industry averages and peer groups. Are your participants getting access to diverse, high-quality funds at competitive rates? You’ll also want to analyze plan administration costs, including recordkeeping, trustee, and advisory fees. Essentially, on behalf of all of the participants and beneficiaries, you need to know: is the plan getting strong value for the money? Given the rapid pace of change in today’s world, benchmarking must be conducted and documented periodically, as the Department of Labor (DOL) reminds us:
Among other duties, fiduciaries have a responsibility to ensure that the services provided to their plan are necessary and that the cost of those services is reasonable…..As a plan fiduciary, you have an obligation under ERISA to prudently select and monitor plan investments, investment options made available to the plan’s participants and beneficiaries,and the persons providing services to your plan. Understanding and evaluating plan fees and expenses associated with plan investments, investment options, and services are an important part of a fiduciary’s responsibility. This responsibility is ongoing. After careful evaluation during the initial selection, you will want to monitor plan fees and expenses to determine whether they continue to be reasonable in light of the services provided.
At Plan Sponsor, Ed McCarthy reports that “less expensive investment options like collective investment trusts have become more widely available,” making it ever more critical to stay abreast of ways to improve the plan, and shares these benchmarking pointers from retirement plan experts:
- As fiduciaries, sponsors primarily focus on fees paid from plan assets, according to Joe Valletta, publisher of the 401k Averages Book, which tracks plan fees. Investment costs usually account for the largest percentage of total plan costs, followed by recordkeeping and adviser costs.
- Jamie McAllister…with Callan, says sponsors should focus on “all-in” fees. This definition includes every administrative expense charged to the plan, not just the more obvious investment, recordkeeping and administrative costs….
- Plans can choose from several methods to benchmark their fees. Data from sources such as Fiduciary Decisions and the 401k Averages Book are available for purchase. Larger plan consultants often maintain internal fee-tracking databases based on their clients’ plans and publicly available information.
- Jennifer Doss…at CAPTRUST, explains that circumstances influence the timing and scope of fee benchmarking. For example, if a plan’s recordkeeper consolidates with another recordkeeper, that would likely trigger a benchmark review.
While benchmarking, it is also a good idea for sponsors to scrutinize plan design features such as employer contributions, vesting schedules, and loan provisions. Are you offering a competitive package that attracts and retains top talent? By comparing these elements to industry best practices, you can gain valuable insights to inform your plan design. Another wise practice for plan sponsors is updating protections for themselves. Although it’s common to outsource administrative and investment services, as fiduciaries, sponsors remain responsible (and personally liable) for the plan. Remember, fiduciary liabilities can be reduced, but never eliminated.
Unforeseen challenges arise all the time for plan sponsors, and seemingly small oversights trigger costly ERISA regulatory action and litigation. In fact, the average ERISA claim costs ordinary businesses over $1.2 million in legal fees. That’s why Colonial Surety makes protection affordable for plan sponsors and their businesses. Armed with our Fiduciary Liability coverage, for a few dollars a day, you’ll have defense costs and penalty limits up to $1,000,000, if faced with alleged or actual breaches of duty in connection with the employee retirement plan. Cyber liability coverage is included at no extra cost, providing additional protection–for the plan and company–against regulatory actions related to data and privacy, as well as expert response services.
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Protection for Retirement Plan Sponsors
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