If your plan sponsor clients are not reviewing their plan reasonableness on a regular basis, then you are missing out on major opportunity to help them mitigate fiduciary risk, improve plan results and protect your business.
According to the Center for Disease Control, 88% of Americans between the ages of 45-64 have seen a health care professional within the last 12 months.[1] So, what does that have to do with retirement plans you ask? Well nothing, but employers often ask, “How often should we do a “check-up” on our 401(k) plan?”
The Department of Labor (DOL) recommends benchmarking about every three years. Of course, there are also best practices which indicate plans greater than $100mm should be benchmarked annually. For plans with assets between $10 – $100mm, they should benchmark every other year and plans less than $10mm every three years. However, benchmarking can also occur as often as needed to ensure optimal value.
Americans (well at least 88% of them) know they should visit their doctor every year to get a physical, so they can monitor your health. Similarly, it’s important to perform regular 401(k) plan checkups with your clients to ensure everything is operating optimally. As you know neglecting your health can lead to more severe problems later on just as ignoring symptoms that a 401(k) is not delivering adequate value can also be problematic.
Here are three primary benefits that can be derived by maintaining a regular plan benchmarking routine:
IT WILL HELP MEET THEIR LEGAL OBLIGATIONS: ERISA holds plan fiduciaries responsible for monitoring plan costs and ensuring they are reasonable, including investment and service provider fees. What’s more, your client’s can be held personally liable because every plan sponsor has a fiduciary duty to act in their participants’ best interests. Regulators also want to see that plan sponsors are documenting their actions. Keeping a detailed record of 401(k) benchmarking reports shows that they’ve done their due diligence regarding the determination of the plan’s fee reasonableness.
IT WILL HELP LIMIT FUTURE LEGAL ACTIONS: A lack of proper process and due diligence can lead to expensive audits and even lawsuits. 75% of 401(k) plan audits conducted last year resulted in fines, penalties or reimbursements, according to the DOL.[2] In recent years, several major cases resulted in 401(k) plan participants successfully proving in court that their employers failed to address excessive retirement plan fees. Regular benchmarking and an accompanying prudent process shows that your clients are proactively keeping tabs on their service provider’s fee reasonableness.
IT WILL OPTIMIZE SERVICES: Benchmarking provides an opportunity to “level up” your plan’s service providers. Are they looking for a provider with cutting-edge technology solutions? Do they want participants to have access to personalized investment advice tools and support? Is the provider responsive? Will they act in a fiduciary capacity? Which responsibilities will they retain as the plan sponsor, and which will the provider take on? These are important questions to ask as you evaluate service providers.
IT WILL RIGHT-SIZE FEES: Unreasonable fees charged to participant accounts can erode participants’ plan balances. Examples of participant fees could include investment management, administration and recordkeeper. Unnecessary costs will result in less savings over time. Keep in mind, you get what you pay for: the lowest-cost option may not always be best for your client. In fact, the retirement plan’s success is largely determined by its quality. To that end, benchmarking is well worth the effort.
IT WILL DRIVE IMPROVED PARTICIPANT OUTCOMES: Are the plan’s auto-features optimized? What about its investment options – do they meet participant needs? What about the participation rate, savings rate, amount of money in auto-diversified options? What about the leaky bucket (cash-outs)? What gets measured through regular benchmarking gets managed. These items can help to drive successful outcomes for the good of participants, sponsors, and the state of retirement readiness in America.
IT SERVES A UNIVERSAL CLIENT NEED: Benchmarking is now a standard service offering. To compete today, advisors must have access to a plan benchmarking solution that considers both fees and services as part of it approach. In addition, service provider and investment fees do change, so your clients should review them on a regular basis. Moreover, benchmarking the plan’s fees, services, value, and extra credit items against those of similar plans can give you and your client the information necessary to establish sound financial relationships with service providers.
IT HIGHLIGHTS YOUR VALUE PROPOSITION: Per recent studies in PLANADVISER Magazine[3], advisors are increasingly concerned that fee compression is taking root. When clients of prospects say “fees”, you should say “value”! Be sure to regularly benchmark not just investments and the recordkeeper and/or TPA, but yourselves as well! By regularly demonstrating the value of the services you provide the plan you will be in best position possible to ensure you receive a reasonable (not lowest) fee that is aligned to the services you provide and the results you have achieved.
Have questions about how your advisor fees stack up vs. peers, benchmarking, or want to conduct a benchmarking exercise? FDI has benchmarking tools that can help retirement plan advisors and plan sponsors determine where your retirement plan currently stands and configuring any necessary adjustments to increase the value and improve participants’ retirement readiness.
[1] https://ftp.cdc.gov/pub/Health_Statistics/NCHS/NHIS/SHS/2017_SHS_Table_A-18.pdf
[2] Meyers Glaros Group. “Have You Benchmarked Your Employee 401(k) Program?” 2019.
[3] PLANADVISER Magazine, 2018 Practice Benchmarking Survey