Managing a retirement plan effectively requires ongoing evaluation to ensure it remains competitive, cost-effective, and beneficial for employees. One of the most crucial tools for achieving this is plan benchmarking. This process allows plan sponsors and fiduciaries to compare their retirement plans against industry standards and make necessary improvements. But what exactly is plan benchmarking, and why is it so important?
What Is Plan Benchmarking?
Plan benchmarking is the process of evaluating a retirement plan by comparing key aspects such as fees, investment performance, plan features, and participant outcomes against similar plans in the industry. The goal is to identify strengths and weaknesses, ensuring the plan remains competitive and aligns with fiduciary responsibilities under the Employee Retirement Income Security Act (ERISA).
Benchmarking typically includes reviewing:
- Plan Fees: Assessing administrative, recordkeeping, investment, and advisory fees to ensure they are reasonable.
- Investment Performance: Comparing the returns of plan investments against industry averages and peer group benchmarks.
- Plan Features: Evaluating plan options such as employer matching contributions, automatic enrollment, and loan provisions.
- Participant Outcomes: Measuring employee participation rates, savings rates, and retirement readiness.
Why Is Plan Benchmarking Important?
- Fiduciary Responsibility ERISA requires plan sponsors to act in the best interest of participants. Regular benchmarking ensures that plan fees remain fair and that investment options are suitable, helping fiduciaries fulfill their legal obligations.
- Cost Efficiency Over time, fees for recordkeeping, administration, and investment management may become uncompetitive. Benchmarking helps identify cost-saving opportunities while maintaining high-quality services.
- Improved Participant Outcomes A well-structured plan encourages higher participation rates, better investment choices, and improved retirement readiness. Benchmarking helps employers design plans that maximize benefits for employees.
- Competitive Advantage Offering a well-benchmarked retirement plan can help attract and retain top talent. Employees value plans with low fees, strong investment performance, and employer contributions, making a competitive retirement plan a key differentiator.
- Regulatory Compliance Regulatory scrutiny of retirement plans is increasing. Conducting regular benchmarking can provide documentation that plan sponsors have taken due diligence steps to review fees and performance, reducing legal risks.
How to Conduct Plan Benchmarking
- Work with a Third-Party Advisor: Many organizations partner with retirement plan consultants who provide independent benchmarking reports and recommendations.
- Utilize Industry Reports: There are numerous benchmarking reports available that compare plan costs, investment returns, and features.
- Review Regularly: Best practices suggest benchmarking your plan at least every 1-3 years to ensure it remains competitive and compliant.
- Compare Plans of Similar Size: Ensure benchmarking is done against plans with similar assets and participant demographics to get the most accurate assessment.
Conclusion
Plan benchmarking is an essential practice for maintaining a high-quality, cost-effective retirement plan. By regularly assessing fees, investment performance, and participant outcomes, plan sponsors can fulfill their fiduciary responsibilities while ensuring their employees have access to a strong retirement savings program. If you haven’t conducted a benchmarking review recently, now is the time to start. Doing so can lead to a more efficient and valuable retirement plan for both employers and employees alike.
