Benchmarking Client Retirement Plans: Providing a Measure of Health

Posted by Mathew Powers, CFA, AIF

April 22, 2015 at 1:30 PM

benchmarking client retirement plansWith the arrival of spring, many of us are gearing up for yet another golf season. And just like any other, this season is sure to be marked by a few highlights and (alas!) plenty of lowlights. The beautiful thing about golf is, no matter your skills on the course, you always have something to compete against—a handicap. Your handicap acts as a benchmark from which you can measure the health of your game.

Not unlike handicapping in golf, benchmarking client retirement plans can help measure the health of these plans. In short, benchmarking is the process of assessing a retirement plan's fees, supported services, and design features to determine how well the plan prepares participants for retirement. In one fell swoop, benchmarking can both help address participants' retirement needs and be a clear demonstration of fiduciary care.

Here, we'll examine the different approaches available for benchmarking a plan and some of the considerations one should make during the process.

Facing Regulator Scrutiny

According to the U.S. Department of Labor (DOL), under the Employee Retirement Income Security Act (ERISA), "fiduciaries have a responsibility to ensure that the services provided to their plan are necessary and that the cost of those services is reasonable." In other words, are plan participants getting what they're paying for? A plan fiduciary must be able to answer this question in the affirmative. Failure to do so, as ERISA attorney Marcia Wagner of the Wagner Law Group notes, "poses a serious problem given the ongoing scrutiny of service fees in the 401(k) plan industry."

A variety of regulations have put the DOL in a better position to evaluate plan fees in relation to services rendered. These include:

  • 408(b)(2) service provider fee disclosures
  • Form 5500 (i.e., the IRS tax filing form for most retirement plans) Schedule C reporting requirements
  • The DOL's recent fiduciary proposal

In this environment, it remains crucial for you to help your plan sponsor clients benchmark their plans. You'll need to pay particular attention to plan fees, to be sure, but what other factors should you consider?

Measures of Success

While fees are a primary focus of benchmarking analyses, other measurements can also help fiduciaries understand how their plans stack up to the competition. For example, many benchmarking reports evaluate:

  • Participant demographics (region, industry, number of employees)
  • Plan design
  • Participation rates
  • Contributions
  • Support services (for both the plan sponsor and participants)
  • Participant outcomes

Still, largely because neither the DOL nor ERISA itself provides plan fiduciaries with a precise road map for satisfying their responsibilities to plan participants, questions remain. How, exactly, should you go about helping your clients benchmark their retirement plans? To start, decide which of two approaches you'll take: doing the analysis yourself or outsourcing it to an independent service provider.

DIY Benchmarking

You may elect to conduct a benchmarking analysis yourself, for your client to evaluate. Using information collected from plan-specific sources, such as vendor reviews and the plan document itself, you can measure your plans against industry data from a variety of free or fee-for-service sources (e.g., 401k Averages Book and the Plan Sponsor Council of America's Annual Survey of Profit Sharing and 401(k) Plans).

While conducting your own benchmarking analysis gives you significant control over the process, this approach does have its drawbacks. First, it can be time-consuming and costly for those involved. Furthermore, some believe that benchmarking client plans for which you may act as a fiduciary creates a conflict of interest. As a result, some look to independent benchmarking service providers to help them perform the analysis.

Outsource It

Selecting an independent service provider to satisfy a fiduciary requirement under ERISA is, in and of itself, a fiduciary act. Therefore, if you opt to outsource plan benchmarking, you must choose the provider with the same care and prudence that you would use when selecting any service provider for the plan. That means carefully considering the following (among other things):

  • Source and accuracy of data used in compiling the benchmark group
  • Size of the benchmark group (the larger the group, the more accurate the picture)
  • Demographic breakdown of the benchmark group and its relevance to the plan
  • How the provider reports the data
  • Breadth of categories being benchmarked

As an advisor, using an independent benchmarking service can bring efficiency and scale to your practice. But be aware, not all benchmarking service providers are created equal!

Where does the data come from? It's important to consider the source. Fiduciary Benchmarks, Inc., for example, gathers its data directly from the plan providers (Fidelity, Vanguard, etc.), while BrightScope, Inc., another independent service provider, sources plan data from IRS Form 5500.

What data is used and how is it presented? Benchmarking service providers also differ in the kind of data they use to evaluate plans and how they present the results. For example, Fiduciary Benchmarks looks at the following categories, evaluating each one individually:

  • Plan expenses
  • Participant success measures, such as deferral rates, participation rates, and company contributions
  • Sponsor, advisor, and participant services

Others may take a different approach. BrightScope evaluates the following categories, combining the results into a single score (e.g., between 1 and 100) for comparison with a plan's peer group:

  • Total plan cost
  • Investment expenses
  • Participant success measures

Many retirement plan fiduciaries find that outsourcing plan benchmarking to a reliable service provider not only helps them save time and money but can also yield a very thorough analysis. The deeper the insight, the greater the opportunity one has to identify potential areas of improvement, which could help participants' overall retirement readiness.

Beyond Responsibility

To some advisors, the thought of benchmarking client retirement plans might seem burdensome—just another step in a long line of fiduciary responsibilities. But let's look at benchmarking from a more positive perspective. The process benefits all involved. Sponsors demonstrate fiduciary care. Participant outcomes can be improved. And in this ever-changing retirement landscape, it presents an opportunity for qualified advisors to serve as an indispensable resource to their clients. Ensuring reasonable fees and working toward an optimal plan design can help plan fiduciaries deliver the best value to their participants and, in turn, help them accumulate bigger retirement account balances.

When it comes to benchmarking, the market is ripe for advisors who understand the resources and services available to help their clients satisfy their fiduciary responsibilities and improve their participants' potential for retirement readiness. Inevitably, advisors who embrace the importance of benchmarking will find themselves a step ahead of the competition, with healthy, compliant, and loyal clients who now have a handicap to better help their plan participants meet their retirement goals.

Have you used benchmarking to help measure a retirement plan's success? Did you perform the analysis yourself or outsource? Please share your thoughts with us below!

The ABCDs of Fiduciary Responsibility for Plan Sponsors

Topics: Retirement Consulting

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