Prudent plans should optimize investment offerings to meet risk tolerance and investment targets. But those two qualities can shift due to market forces rendering benchmark data inaccurate. Frequent benchmarking can strain a benefits department if done in-house. Working with an experienced financial advisor may reduce this workload.
Employers know that a strong benefits lineup attracts and retains quality employees. They also know those employees are the best asset their company has. But they might not know what they don’t know: how those costs and fees compare to their competition. It can be hard to know what points to look at when comparing plans. Yet benchmarking is essential to plan management. In fact, regular benchmarking is vital to fulfilling fiduciary duties. A tailored and dynamic approach can both mitigate litigation and benefit retention.
Employers may feel caught between benefits costs and compliance needs. Since the Supreme Court’s decision in Hughes v. Northwestern University there has been a rise in lawsuits about fees. But simply making changes to reduce fees can create problems in other areas. Yet, not making changes can also increase litigation risk. An appropriate benchmarking plan can spot potential cost improvements and satisfy fiduciary duties.
When it comes to benchmarking, employers need to focus on three issues. First, benchmarking is not a one and done process. Instead, employers need a systematic approach. The Department of Labor suggests that employers benchmark every three to five years. However, more frequent benchmarking can offer benefits. Prudent plans should optimize investment offerings to meet risk tolerance and investment targets. But those two qualities can shift due to market forces rendering benchmark data inaccurate. Frequent benchmarking can strain a benefits department if done in-house. Working with an experienced financial advisor may reduce this workload.
In addition to spotting investment adjustments, frequent benchmarking can also find plan changes. As a company grows so too does the variety of its workforce. Those changes can lead to a mismatch in plan services with participant use. Benchmarking can also spot tech areas in need of updates.
While regular benchmarking can ensure that employers aren’t overpaying for services, it can also ensure participants aren’t being dinged by unreasonable fees. It can also help prune unneeded options. For example, regular benchmarking may have spotted the oversaturation of investment options at issue in the Hughes case.
Benchmarking should be both comprehensive and granular when it comes to demographic shifts. It should find the employer’s worker trends and consider industry trends. Doing so could discover areas where a plan needs to change its design remain comparable. A benchmarking assessment can discover both new features to add as well as where to cut due to lack of use.
Second, comparison is a difficult aspect of benchmarking yet essential to mitigating litigation. The basics of benchmarking should include comparisons of asset classes on performance, expense ratios, and volatility. However, determining who to include in the comparison can be tricky. Courts have ruled that the comparison must include more than the size of the plan or the funds offered. It should include the services provided by the plan and its recordkeeper. Getting the comparison points correct is essential. Internal communication about benchmarking can also mitigate litigation risks in some cases by helping employees understand which plans aren’t comparable. For many employers, a financial advisor's industry expertise can be invaluable.
Third, benchmarking data can also help employers who haven’t yet offered a retirement benefit. While there is no leading theme of why employers hold off on offering retirement plans, surveys indicate that administrative costs keep some smaller businesses from offering retirement plans. Yet, companies that offer 401(k)s are better positioned for growth. For some companies, benchmarking data can better inform strategic decisions about adding retirement plans to employee compensation. For others, selecting a Multiple Employer Plan (MEP) or a Pooled Employer Plan (PEP) or may be an attractive option.
MEPs allow members of a common group, such as an industry association, to offer customizable and fiduciary-managed 401(k) and profit-sharing plans. MEPs “pool” the resources of members to provide access to high quality asset groups at competitively low expense ratios. For example, the NJBIA offers a Retirement Solution to its members so that they can meet state requirements. Their plan helps save members the costs associated with oversight of plans, such as audits, recordkeeping details, fees, as well as staff time. PEPs are similar to MEPs but involve unrelated employers and there are some differences in how the organization offering the plan can outsource some of the fiduciary responsibilities.
These articles are prepared for general purposes and are not intended to provide advice or encourage specific behavior. Before taking any action, Advisors and Plan Sponsors should consult with their compliance, finance and legal teams.
Before leaping into the unknown, we recommend a thorough examination of your plan. Because we are experts in the field, we know the marketplace and know what your existing vendor is capable of offering. Through this examination, we can help you optimize the service you receive.
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