Benchmarking: The Key to a 401k Plan Sponsor’s Fiduciary Compliance Review

(The following is the first part of a three part series on benchmarking 401k plans.)

Benchmarking is the key component of any 401k plan sponsors fiduciary compliance review. The Department of Labor isn’t looking for perfection from plan sponsors, but it does want to be insured they’re at least on the right path. Knowing how one’s 401k plan stacks up against one’s peer certainly places the plan sponsor on the road to fiduciary diligence. Unfortunately, far too few 401k plan sponsors conduct these fiduciary self-assessments. And that’s a shame because, once the first review is completed, the others follow more easily after that.

How does one go about undertaking a fiduciary compliance review? It starts with a thorough vetting of the plan history. Reviewing the plan’s history helps the 401k plan sponsor document and justify the various aspects of the company’s retirement plan. For smaller companies, where the individuals who first established the plans still remain, this represents a simple process that, once done, need only be updated periodically. In this first part, we’ll briefly discuss the areas a 401k plan sponsor needs to evaluate pertaining to the plan’s history.

Plan Origins – Plan sponsors establish plans for specific reasons. In most cases, the reasons have to do with providing employee benefits in order to attract the best employees. If an employer can provide a better retirement plan, it should find workers more willing to join that company. Think of the “hip” firms in Silicon Valley who provide a literal menu of benefits (meaning, they regularly provide meals to employees). This benefit addresses some very basic employee needs (i.e., eating) while giving the company what it wants (i.e., dedicated employees who spend more time at the office being more productive). Ultimately, the origin of the plan finds itself in the plan’s mission statement, and this should be included in the plan’s investment policy statement, as we’ve noted earlier (“How Should a 401k Plan Sponsor Construct an Appropriate Investment Policy Statement?” FiduciaryNews.com, June 7, 2011).

Plan Evolution – No doubt the typical 401k plan changes over time. These changes can derive from changes in the company, changes in its workforce or external changes like new or different regulations. For example, the 2006 Pension Protection Act permitted (and encouraged) 401k plan to begin doing things they weren’t permitted to do before. Likewise, in December 2011 we saw the new Participant Advice guidelines come from the DOL. The year 2012 may offer yet more changes as the new Fee Disclosure Rule may radically alter the way service providers provide their services and the expected new Fiduciary Rule may change how the plan is structured. So, change is good and it’s expected. More importantly, it needs to be documented so those responsible for the plan in the future can better understand the reasons and implications of these changes.

Standard Provisions – Many 401k plans use prototype plan documents. Plan sponsors choose these because: a) they are more readily available today than they were in the past; b) today’s prototypes offer the maximum in flexibility, so plan sponsors can customize their plans; and, c) a third party usually has the responsibility for keeping the prototype up-to-date. Even better news, prototype plan documents often come in a “fill-in-the-blank” format, so it’s easy for the plan sponsor to document the standard provisions within the plan. Understanding the nature of these provisions is important for the next two areas.

401k Plan Sponsor Fiduciary Liability – Often, the standard provisions chosen in plan document will outline nature and scope of the fiduciary liability undertaken by the plan sponsor. For example, plan sponsors that offer employer matching will take on more fiduciary liability than those who don’t. It’s critical, then, for plan sponsors to know how each standard provision impacts their personal fiduciary liability. The reason for this is not so much as to eliminate fiduciary liability, but to manage it and, when possible, reduce it.

Comparing Your Plan vs. Competitors’ Plans – If the goal is truly to provide a benefit that makes the plan sponsor’s firm a better workplace than the plan sponsor’s competitors then: a) plan sponsors must know what’s unique about their plan; and, b) plan sponsors must know what their competitors offer. Of course, it’s often difficult for one plan sponsor to gather intelligence on another plan sponsor. This is where reliance on third party benchmarking providers becomes important. This is really the meat of the subject in the next two installments of this series.

Creating a written record of the 401k plan’s history forms the foundation for a good fiduciary compliance review. It can also reveal some cracks – like missing or outdated information – that might need to be filled in before moving on. Ultimately, it sets the table that will allow plan sponsors to independently benchmark their plans.

But before we can talk about how 401k plan sponsors can best benchmark their plans, we’ll need to identify what we’ll be grading.

Part I: Benchmarking: The Key to a 401k Plan Sponsor’s Fiduciary Compliance Review
Part II: Are 401k Plan Sponsors Making the Fiduciary Grade?
Part III: The Best Way 401k Plan Sponsors can Benchmark Their Plans