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“How-to” Guidelines to Follow When Creating 401k Plan Benchmarks

January 27
01:50 2015

The 401k environment has evolved over the decades. One of the best examples lies in the focus of plan benchmarking. Even within the past few years we’ve seen a dramatic shift towards emphasizing retirement readiness. This reflects the KONICA MINOLTA DIGITAL CAMERAbroader understanding among regulators, professionals, and plan sponsors that the purpose of any retirement plan is to best prepare employees to live a comfortable retirement. Oddly, though, for all the talk of benchmarking, no “benchmark” for benchmarking actually exists.

“I am not aware of anything that mandates any particular benchmark,” says Fred Reish, chair of the Financial Service ERISA Team, at Drinker Biddle & Reath in Los Angeles. “There is nothing in ERISA that specifically requires the use of benchmarks or of any specific information. Instead,” he adds, “the ‘requirement’ comes from logical analysis, DOL guidance and court decisions. Even in the participant disclosures – in the Investment Comparative Chart requirement, the DOL referred, in so many words, to broad indexes or benchmarks that were commonly accepted. In other words, the DOL and the courts defer to marketplace practices and pricing, and do not try to substitute their knowledge for the wisdom of the marketplace.”

Regulators treating benchmarks as a fungible concept appears more appropriate than one might guess. Between changes in technology, new revelations from academic research, and even evolving court cases, the target benchmark can move considerably. Perhaps the best example here occurs in the realm of fees. What’s acceptable today can get you in trouble tomorrow, so caveat emptor is more than just a quaint Latin cliché, it’s a stark warning to 401k plan sponsors.

“The veritable explosion of 401k fee cases, including those brought by the seemingly indefatigable Jerry Schlichter, point to the need for plan sponsors and their vendors to ‘raise the bar’ and be more attune and aware of what fees are appropriate and defensible and which may be viewed with a jaundiced eye, in the current environment,” says Marcia S. Wagner, Founder and Principal of The Wagner Law Group in Boston, Massachusetts, a law firm specializing in ERISA, employee benefits and executive compensation, with offices in Massachusetts, Florida and California. “For example, the charging of 12b-1 fees even for large plans was ‘par for the course’ just a short while ago, and now such fees are rare in the larger and mid-size plan space and those plans with fiduciary advisers, regardless of size, and ditto for revenue sharing arrangements which may rebate to financial advisors and result in variable compensation. Some may argue these types of compensation structures were never permissible given the prohibited transaction rules, but the 401k fee cases have shined a bright light into a once murky corner of the 401k world. Moreover, the level of fees for the same, actually in many cases, better services, have been significantly reduced as of late, as a result of plan sponsors and vendors trying to get ahead of the curve and not be an audit target by the DOL or a litigation target by the plaintiff bar.”

It’s difficult, then, for the prudent 401k plan sponsor (i.e., one intent on meeting one’s fiduciary duty) to define benchmarks in a static way. Still, despite their changing nature, it doesn’t mean there aren’t useful guidelines to help plan sponsors define meaningful benchmarks.

“Good benchmarks are those that are easy to measure, that are comparable across different types of retirement plans and asset classes, and that people not in the finance industry can easily understand,” says Mathew Dahlberg, Owner of 111th Street Investments LLC in Kansas City, Missouri.

Just because something is “easy to measure,” however, doesn’t mean it makes an appropriate benchmark. Jairo Gomez, Director of Retirement Plan Services for Hanson McClain in Sacramento, California , says, “You need good data. The old adage of ‘garbage in-garbage out’ really does apply to 401k benchmarks. If the data is old or in the case of a fee benchmarking report, fees have not been adequately broken out, then no matter the length or clarity of the report produced, the output will be incorrect. I think it is also a good practice to use a third party fiduciary who works in the retirement plan field and can sort through the mountains of information that benchmarking reports produce.”

Perhaps, before we concern ourselves with measurability, it’s better to first determine relevance. Here, we must begin with the primary objective of the retirement plan itself.

“The sole purpose of a 401k plan is to help ensure the retirement readiness of an employee base,” says Kendrick Wakeman, Founder and CEO at FinMason in Boston, Massachusetts. “So,” continues Wakeman, “all benchmarks need to address that fundamental question in some way. This would be a fairly simple endeavor, except that retirement readiness is not easily observable. Everyone’s financial situation is unique and it is difficult to glance down a page of numbers and say one employee is on track while another is not. But, just because we cannot observe the problem does not mean we can’t observe the potential symptoms and use those as a basis for gauging a plan’s effectiveness.”

In that light, the next two segments will provide concrete examples of the right way and the wrong way to go about establishing 401k plan benchmarks to detect these symptoms.

Part I: “How-to” Guidelines to Follow When Creating 401k Plan Benchmarks
Part II: The 7 Most Important 401k Benchmarks Every Fiduciary Should Measure (available immediately only to Peer-to-Peer Community Bronze Class Members)
Part III: The 5 Most Overrated 401k Benchmarks – A Fistful of Fiduciary Faux Pas (available immediately only to Peer-to-Peer Community Bronze Class Members)

Are you interested in discovering more about issues confronting 401k fiduciaries? If you buy Mr. Carosa’s book 401(k) Fiduciary Solutions, you’ll have at your fingertips a valuable reference covering the wide spectrum of How-To’s (including benchmarking) every 401k plan sponsor and service provider wants and needs to know.

Mr. Carosa is available for keynote speaking engagements, especially in venues located in the Northeast, MidAtantic and Midwestern regions of the United States and in the Toronto region of Canada.

About Author

Christopher Carosa, CTFA

Christopher Carosa, CTFA


  1. Jeffrey Hunt
    Jeffrey Hunt April 08, 12:03

    Which stores are offering your book, The 401(k) Fiduciary Solutions Book.?

  2. Christopher Carosa, CTFA
    Christopher Carosa, CTFA Author April 08, 16:30

    I think you can go to pretty much any book store and order it if they don’t have it in stock. The bigger stores (like Barnes & Noble) are a better bet, and you can always just order it from Amazon.

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