Bench-marking is a service we conduct for you as a best practice that documents your role as a fiduciary to ascertain if fees are reasonable. Your responsibility is not to get the lowest pricing, but rather show that fees are reasonable in light of services rendered. The 401(k) industry is changing. It has been slowly evolving over the past 30 years but has seen fairly significant developments in recent years, in particular, in fee transparency disclosures and most recently the implementation of the DOL fiduciary rule. The largest companies across the nation have already started to thoroughly review their plans to make sure they are fulfilling their fiduciary duties and providing a competitive plan. Many companies in the small to mid-size space, however, have not yet made bench-marking their plan a priority even though they should. If you are one of those companies, here are four reasons why bench-marking your plan should a top priority.
1. Reduce your personal and company liability
Under ERISA, every sponsor has a fiduciary duty to its participants. That fiduciary duty requires sponsors to monitor and benchmark service providers to ensure fees are reasonable and service providers are performing as they should. As evidenced in recent employer retirement plan lawsuits, failure to do so can result in massive fines and settlements.
The DOL and Employee Benefits Security Administration (EBSA) want to make sure that you are not only fulfilling your fiduciary responsibility, but documenting your actions. In the event of an audit, you will want to be able to show that you have benchmarked your plan and that you have taken appropriate actions. You will want to be able to at least show the following:
- You have regularly bench-marked the plan?
- You know who the fiduciaries are on the plan?
- The fiduciaries are properly bonded?
- The plan is reasonably priced for participants?
2. Save the company and plan participants money.
Most companies implement a 401(k) with the purpose of helping their employees retire. It, however, is much more difficult for an employee to retire with sufficient savings if administrative and investment fees are eating away at their savings. That is why ERISA requires a sponsor to ensure that fees are reasonable, and a benchmark is a great way to do that. Find answers to the following questions:
- How much is the company paying in admin fees? (hard dollar fees)
- How much are participants paying in investment, admin and recordkeeping fees? (soft dollar fees)
- How many providers are being paid on the plan? TPA, Recordkeeper? Other?
- What service does each provider offer the plan?
- Is there any indirect compensation in the plan such as revenue sharing or 12b-1 fees?
Benchmarking your plan doesn’t even mean that you have to switch providers. While benchmarking your plan, if we help you find more competitive rates elsewhere, or find that you have above average rates for a plan of your size, we can approach your providers to ask for lower fees. Most of the time, you will succeed in lowering your rates this way. And if your current providers are unwilling to accommodate, then you know that you can go elsewhere
3. Improve your service providers
An additional aspect of benchmarking your plan can be to analyze service offerings in addition to prices. Not all providers are created equal. Some have extremely high service models, some have advanced technology, and others simply get the job done. Look into the following items:
- How much work is passed on to you in administering the plan?
- Do your providers sign and act in fiduciary roles?
- How responsive is the service provider?
- How competitive is the service providers offering and fees?
- How does the provider’s technology compare to other providers?
- Do participants have access to customer service and/or investment advice?
- Have you had any complaints about the provider?
Depending on your company needs, you may be able to find a provider that can better accommodate at the same, if not better rates. In many cases, you can even work with your existing providers to improve what you are receiving. Many providers offer multiple service levels, and you may not be receiving the most bang for your buck.
4. Improve the actual plan itself.
Improving service providers can definitely improve your plan, but sometimes it is even more important to improve your actual plan. This means that you need to find out if your existing plan document, plan structure, and plan design are meeting your goals. A thorough benchmark can help you identify areas of opportunity to reduce liability, improve participation, increase contribution rates, optimize profit sharing, or enhance employee education. You may have outdated plan provisions or the plan lacks efficient plan features. Find answers to the following questions:
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- Has your plan been restated within the required time-frame?
- Has the plan document been reviewed by an ERISA attorney or by the IRS?
- Does the company match and eligibility reflect company goals?
- Is the plan safe harbor? Do you have ROTH? Auto features?
- What is the participation rate of your plan compared to plans of similar sizes?
Correcting any of these can improve your plan as a whole. Don’t assume that your plan should remain the way that it is just because it has always been run one way. A proper benchmark can help you identify key areas of opportunity to improve your plan. With all of these potential benefits, it doesn’t make sense to delay bench-marking your plan. If you don’t know what to do or how to do it, give us a call.