Benchmarking for 401(k) Plan Sponsors

A benchmark is a standard or point of reference by which something can be compared or assessed.  As a 401(k) sponsor, benchmarking is simply a way of surveying your plan in the grand scheme of things to see how it measures up against plans of comparable size or in the same industry. A benchmark report can help you evaluate whether to make the effort to upgrade the features and benefits of your existing plan, but it also can help you identify and correct weaknesses, manage fees and address important fiduciary liability issues.

Getting it Done

Though benchmarking can be complicated, it is an important part of protecting participant interests and reducing fiduciary liability. Fortunately, as a sponsor, you have a variety of options available for benchmarking:

--Hire full time in-house professionals to monitor the plan and keep it updated. Though this may work well for larger plans, it’s usually not feasible for smaller companies.

--Outsource benchmarking with a professional fiduciary or consultant. Practically speaking, since most companies don’t have sufficient in-house expertise to do it themselves, outsourcing benchmarking is usually the best option. Not only is it more cost effective, but a professional fiduciary will have up-to-date information on benchmark data across a broad array of plan environments. Additionally, because they keep up to date on the every-evolving ERISA field, an experienced professional will often see things that impact a company’s plan before an in-house employee can.

--Hire a rating firm to do a benchmark report. A growing number of independent companies offer ratings, data and analysis on 401(k) plans. These firms offer a number of different approaches and methodologies, each with its own strengths and weaknesses.

--Use your current plan provider. Because they often don’t fully understand the conflicts of interest inherit in the retirement business or know about the alternatives, many sponsors rely on their plan providers for benchmarking. Unfortunately, the worst source of benchmarking information is usually a company’s current plan provider.  

--Use individual reports and publications to evaluate your plan yourself. A number of excellent resources are available to compare plan expenses, statistics, participation rates, loan frequency, ratings, costs and fees. Contrary to popular belief, it is not impossible for small businesses to cut through the red tape to evaluate fees. You just need to know where to look for fees and how to benchmark them.   

Many 401(k) sponsors are unaware of their obligation to ensure that services provided in their plan are necessary and that contracts and arrangements, as well as costs, for those services are reasonable. Benchmarking can help you fulfill your fiduciary responsibilities as a plan sponsor.