As a plan sponsor, 401(k) benchmarking is a fiduciary duty that you can’t afford to ignore. Simply put, this process evaluates the fees associated with your plan to ensure they are reasonable and competitive, particularly in relation to the amount your plan participants are paying.
The Department of Labor (DOL) expects plan sponsors to know and manage their 401(k) plan fees. But when you’re trying to run your business and offer high-quality benefits to your employees, this can be overwhelming to figure out on your own. That’s why FSRP conducts independent benchmarking as a best practice for both prospects and existing clients.
Let’s dive into why it’s so important for plan sponsors to have a thorough benchmarking process and some best practices.
What is 401(k) Benchmarking, Exactly?
401(k) benchmarking involves comparing your plan’s fees to those of similar plans/providers to ensure that your employees are paying fair and reasonable provider fees. Most of these fees are paid for by the plan participants, which is why it’s a crucial part of your fiduciary responsibility—yet overlooking this process is a common mistake among 401(k) plan sponsors.
And it’s not just about cost, it’s also about the value and service provided. Benchmarking reviews the quality of service and investment options your plan offers.
Why is Benchmarking So Important?
Ensure Compliance with Fiduciary Responsibilities
Part of your fiduciary responsibility (i.e., acting in the best interests of plan participants) is to ensure 401(k) fees are reasonable—and the only way to do this is to benchmark fees against other providers. In fact, the DOL recommends benchmarking every three to five years.
Failing to regularly assess and benchmark fees could expose your business to legal and regulatory risks, including potential lawsuits for excessive fees. Independent benchmarking analysis demonstrates your commitment to fulfilling your fiduciary duty and helps prevent noncompliance.
Identify Cost Savings Opportunities
Not to mention, fee compression over the last decade can mean potential savings. Without a 401(k) plan benchmarking process, however, you won’t necessarily benefit from this downward trend in 401(k) plan fees.
Providers rarely offer lower fees without prompting, leaving it to you or your advisor. If the conversation isn’t initiated by either you or your advisor, your plan participants will likely be paying more than what is necessary, eating into their retirement savings. Hence, the DOL’s high expectations on executives, fiduciaries, and investment committees to know their plan fees and actively manage them!
Strengthen Your Plan & Employee Morale
Additionally, 401(k) benchmarking helps you:
- Gain clear insights into how fees are distributed among recordkeepers, investment managers, and other service providers so you can hold them accountable, negotiate better terms, or explore alternative solutions if necessary
- Boost employees’ trust and confidence in the plan, thus increasing participation rates, contribution levels, and overall satisfaction with your benefits offering
- Make strategic plan decisions thanks to the valuable data on how your plan compares to industry standards
What to Compare (It’s More Than Just Recordkeeping Fees)
Many plan sponsors lack a comprehensive understanding of their 401(k) fees. Start by understanding exactly what is included in your plan costs, which could include:
- Administrative fees: Your plan’s recordkeeper charges fees to manage participant accounts, process contributions and distributions, provide statements, and maintain compliance. These fees can be charged as a flat dollar amount per participant or as a percentage of assets.
- Investment management fees: Every fund in your plan’s investment lineup comes with a built-in cost called an expense ratio, a percentage of assets charged annually by the fund manager. Actively managed funds often have higher fees than index funds. Benchmarking can avoid hidden fees and identify opportunities to offer more cost-effective options without sacrificing quality.
- Advisory fees: These are the fees paid to a financial advisor or consultant to help oversee the plan, assist the investment committee, conduct fiduciary oversight, and educate participants.
- Level of service vs. cost: Finally, it’s important to ensure fees are not only reasonable but also aligned with the services provided.
401(k) Benchmarking Best Practices
Work with an independent fiduciary advisor who can serve as an experienced, objective third party to help you evaluate fees without bias. A fiduciary advisor has your employees’ best interests in mind and will highlight areas where you may be overpaying. We get it—navigating 401(k) benchmarking is a lot for employers, which is why, when done well, it’s typically led by a fiduciary advisor.
Document your benchmarking process and decisions to demonstrate that you’re fulfilling your fiduciary duty and protecting your participants. You should maintain records of your review process, including comparisons made, decisions reached, and any actions taken as a result.
Benchmarking should compare your plan to others of similar size, industry, and complexity. Be cautious of “free” benchmarking reports from providers that only show data favorable to their own fees. Independent advisors can access reliable, third-party databases to ensure a true apples-to-apples comparison.
And of course, follow the DOL’s guidance and benchmark your plan fees every three to five years—or sooner if your plan has grown significantly or changed providers—to remain competitive and compliant over time.
The Bottom Line: Protecting Your Company & Your People
Benchmarking isn’t just a good idea—it’s a critical part of being a responsible plan sponsor. By regularly reviewing your plan’s fees, you can help ensure compliance, protect your employees’ retirement savings, and maintain a competitive plan in a shifting landscape. And with the right partner, like a fiduciary advisor who understands the benchmarking process, it doesn’t have to be complicated. Taking this step demonstrates to both employees and regulators that you’re paying attention and prioritizing participants.
If you need an experienced advisor to handle your 401(k) benchmarking responsibly and objectively, reach out to FSRP today!