The Best Way 401k Plan Sponsors Can Benchmark Their Plans

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

It’s evident all 401k plan sponsors ought to periodically benchmark their plans. Benchmarking provides a clear vista from which to survey the 401k plan. This helps identify weaknesses that can be corrected and addresses important fiduciary liability issues. We’ve established the concept of creating a Fiduciary Report Card to facilitate this process. Now comes the question of exactly what kinds of structures and procedures should a 401k plan sponsor invoke to benchmark their plans.

For some plans, the best solution means, ideally, hiring dedicated, full-time professionals to monitor the plan and keep it updated. Large companies can afford a staff devoted to this work. But, in the age of lean and mean, with constant pressure on the bottom line, is this really the best solution for them? In this sense, smaller companies may have an edge. They have a demonstrated need to find the most effective solution to addressing all needs, not just those associated with benchmarking their retirement plan. Small companies already have a culture of outsourcing to providers with a comparative advantage.

In many cases, the best solutions for 401k plan sponsors will be to hire a professional fiduciary who focuses solely on the ins and outs of 401k plans. Rich Lynch, COO at fi360, says, “Practically speaking, nearly all plans should outsource benchmarking, because typically they do not have sufficient expertise to do it themselves.” Unlike even dedicated in-house staff, who suffer from knowing only one plan, the professional fiduciary will have up-to-date information on benchmark data across a broad array of plan environments. Since the ERISA field is constantly evolving, issues can pop-up first in one segment of plans before impacting other segments. An experienced outside provider will often see things that can impact a company’s 401k plan before an inside employee can.”

There’s another reason why companies find hiring outside consultants attractive. As bidding for services will be competitive, presumably the plan will pay a reasonable cost for demonstrably value-added services. Independent firms might possess economies of scale companies, by themselves, cannot obtain. Of course, there’s another plus to hiring an outsider. If there’s ever an issue with the provider, it’s a lot easier to remove outside providers than to fire an employee.

The issue, then, becomes one of deciding how to obtain outsourced data. Lynch says it’s important to get the most recent data, but who you get the data from is also important. He says, “The down side is the outsourced entity may have biases that limit their ability to be objective.”

Mike Alfred, Co-Founder and CEO at BrightScope, located in San Diego, California and a leader in the area of 401k benchmarking, offers this blunt warning: “The worst source of benchmarking information is usually a company’s current provider. Unfortunately, most plan sponsors rely solely on their providers probably because they don’t believe they have an alternative and don’t fully understand the conflicts of interest inherent in the retirement plan business. There are a growing number of independent firms that offer ratings, data, and analysis on 401k plans. There are a number of different approaches and methodologies and each has its own strengths and weaknesses.”

Both Lynch and Alfred agree provider data can be useful, but only if they’ve obtained it from a verifiable source. Alfred says plan sponsors “should not rely on data from their provider unless that firm has partnered with an independent third party like BrightScope for data and reporting. That is the only way that a plan sponsor can be sure that the benchmarks created are robust and unbiased.” Lynch adds, “The gold standard for ensuring those claims are credible is if the consultant can provide an external, objective assessment of their fiduciary practices.”

In lieu of hiring a consultant or rating firm, 401k plan sponsors have other alternatives. David Huntley, publisher of the 401k Averages Book, suggests, “For plan level statistics, participation, contribution rates, loan frequency and more, the Profit Sharing Council of America’s annual survey is an excellent resource.  For investment performance, Morningstar and Lipper have been doing that for a long time and have great tools.  For plan expenses we have published the 401k Averages Book since 1995 and think it is an excellent resource as well.”

As Huntley alludes to, it’s important for benchmarking to be as precise as possible. This is especially true in the area of fees. Alfred points out, “To the extent possible, you must break out the administrative and recordkeeping fees separately. Bundled providers will scream bloody murder but it’s the only way to do an apples-to-apples comparison.” Still, Huntley feels, “Even with clearer disclosure about how the fee are broken down plan sponsors should not lose sight of what the total expenses their participants are paying and what the value of the services the participants are receiving is.”

Alfred is more sanguine on fees, especially with the DOL’s new Fee Disclosure Rule that will soon be implemented. “Most plan sponsors have no idea what their participants are paying,” he says. “I think many of them will be surprised to learn just how little they’ve known all these years.”

All of which may provide a major move on the part of plan sponsors toward clear, independent benchmarking. As Huntley advises, “The decision to outsource benchmarking needs to a third party, to use your provider’s resources or to conduct the project on your own is an important one and should be done with the same consideration as other decisions you make about your plan.  Even if you decide to fully outsource this function you will want to be an active participant in the findings and continue to monitor the results.”

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