Employees have very little say in the providers that their company chooses to administer their 401(k) or 403(b) plan. Likewise, have very little control or input on the plan fees that are assessed against their accounts. That makes fee oversight your responsibility—which includes 401(k) benchmarking.
Of course, easier said than done while you’re operating a business and managing your team! Unfortunately, in our experience, very few companies have a strong and consistent fee benchmarking process. Those that do partner with a fiduciary advisor who can guide the process and keep plan sponsors informed and compliant.
You established a retirement plan to help your employees, not watch their money go toward excessive fees. Benchmarking helps ensure their retirement savings aren’t being eroded over time.
What Benchmarking Means for Your Team
Benchmarking entails regular reviews that compare 401(k) fees to similar providers. Through this process, employers can ensure fees are reasonable and employees aren’t overpaying, maximizing their retirement savings over the long term.
So, why is 401(k) benchmarking so important for your employees? Namely, many fees are deducted directly from participant accounts. Benchmarking:
- Provides clear insights into how much participants are paying for plan services, including investment management, recordkeeping, and administrative functions
- Empowers participants to better understand their plan and what their fees are covering
- Creates transparency that fosters participants’ trust and confidence in the plan
Additionally, benchmarking evaluates plan quality related to the level of service, investment options and performance, and participant support offered. Plan sponsors can renegotiate contracts or find a new plan provider to improve overall plan quality and ensure it’s operating in the best interest of the participants.
Why It Matters: Small Fees, Big Impact
Consider that even a fraction of a percent in fees can significantly reduce long-term retirement savings. While low fees allow savings to grow faster, high fees compound against employees over decades.
For example, a seemingly small 0.25% fee reduction could translate into tens of thousands of extra dollars in an employee’s account at retirement. Every dollar lost to unnecessary fees is a dollar that can’t earn investment returns for the employee.
Not to mention that without benchmarking, you and your employees may miss out on industry-wide fee compression (i.e., decreasing fees). Failing to adjust means employees are stuck paying outdated prices in today’s market. It probably won’t surprise you to learn that most 401(k) providers won’t voluntarily lower fees—meaning it’s up to the plan sponsor and fiduciary advisor to do their due diligence and advocate for the best plan fees and highest quality services.
An expensive plan can also cause a breakdown in employee morale and trust in leadership when employees discover the associated costs. Neglecting benchmarking and your due diligence sends a message that employees' benefits and well-being aren’t a priority.
A Hidden Equity Issue
Without 401(k) benchmarking, your plan could also have a hidden equity issue. Higher fees disproportionately impact lower-paid employees, as is particularly evident with flat-dollar fees. For someone with a smaller account balance, a flat $50 annual recordkeeping fee may represent a much higher percentage of their savings than for a highly compensated employee. Plus, lower-paid employees already face challenges in contributing enough to their retirement savings—and excessive fees only widen this retirement readiness gap.
Fee benchmarking helps ensure fair fees across all income levels to create a more equitable benefits package. It demonstrates that leadership is acting in participants’ best interest, which can build loyalty, especially among lower- and mid-income staff.
How to Be Proactive
As the plan sponsor, you’re required by the Employee Retirement Income Security Act (ERISA) to act in the best interest of your plan participants—in other words, your fiduciary duty. To meet this, it’s best to conduct 401(k) benchmarking at least every three to five years, according to the Department of Labor’s (DOL) recommendation. However, you may benefit from doing it more often, especially if the plan grows quickly or market conditions change.
Follow these best practices to help your company stay compliant and adhere to its fiduciary duty:
- Work with a fiduciary advisor, who can help ensure you’re seeing the full picture and identifying realistic opportunities to improve your plan.
- Set a recurring schedule to ensure 401(k) benchmarking doesn’t fall through the cracks.
- Involve your investment committee during reviews so decisions reflect multiple perspectives and responsibilities.
- Document your review process to show you’re meeting your fiduciary responsibilities and have a clear plan for addressing excessive fees.
- Review services in addition to fees, as you may be able to negotiate more value for the same price, not just lower costs.
- Don’t rely solely on your provider’s data, which may be limited or biased toward keeping your business.
- Stay up on what other plans are paying so you’re prepared to negotiate better deals for employees.
The Win-Win: Lower Fees, Higher Trust
When you keep plan fees in check, everyone benefits. Employees see more of their contributions stay in their accounts, growing over time.
Meanwhile, you demonstrate your commitment to protecting their interests. A well-managed, low-cost 401(k) is more than just a compliance requirement—it’s a powerful part of your benefits package that can help attract and retain top talent.
Fair 401(k) fees and the message that you’re looking out for your team’s financial well-being also boosts participation rates and company loyalty.
A fiduciary advisor will provide you with both the expertise and independence needed to make confident decisions about your plan. The result? A retirement benefit that works harder for your employees and reflects well on your organization.
If you’re searching for a fiduciary advisor who will partner with you to implement vital processes like 401(k) benchmarking, contact FSRP today!