Benchmarking Your Organization's Retirement Plan — It’s More Than Just Fees
A participant-initiated lawsuit recently filed against Invesco is yet another reminder that monitoring plan investment offerings, along with fees and expenses, is a vital part of an employer’s fiduciary duties in offering a qualified retirement plan. Now, Invesco is being investigated for several possible fiduciary breaches that the organization may have caught and addressed had it looked more closely at its plan.
The Department of Labor (DOL) requires you, as a plan sponsor, to demonstrate that you understand your plan’s fees and expenses and conclude that they are reasonable. While many organizations focus their benchmarking on these areas, there is a full array of qualified retirement plan considerations that should be reviewed on a periodic basis.
Looking at other key metrics such as employee participation rates, impact of education campaigns, comparisons with competitors, plan design, and utilization of online tools and resources can help you see the impact your plan is having on participants — and gives you an opportunity to make necessary adjustments that will improve your plan. It is not only the practice of monitoring the plan, but also taking a holistic approach so that your plan continues to be relevant to your company and the workforce you are trying to attract and retain.
Start by reviewing your 408(b)(2) disclosure notice
In order to generate a benchmarking report, you should request or locate a copy of your most recent 408(b)(2) plan sponsor fee disclosure notice. These sponsor disclosures should be sent to you annually by your plan’s primary service provider, as required by DOL regulations. This notice outlines fees and expenses charged by your service providers and certain fund expenses, which are paid by the plan and the plan sponsor.
Include non-investment metrics in your study
Plan expenses impact your plan’s growth and may reduce average participant account balances over time. So it makes sense that benchmarking fees, expenses, and investment performance are included in any standard report; however, other important items worth reviewing include:
- Participation rates by employee classification (e.g., management, technical, administrative, geographic location, age, gender, and salary bracket) and average deferral rates
- Trends in deferral rates over time (past three to five years)
- Frequency of participant investment election changes
- The plan’s impact on recruiting, retaining, and motivating employees
- Utilization of plan features and benefits (e.g., calculators, participant loans, automatic escalation, and automatic rebalancing)
- Correlation between education campaigns and participant-directed activity. For example, if an education piece goes out about increasing deferral rates, how many increases are initiated in the next three to six months?
- Measurement against industry competitors (many benchmarking reports include this information)
Examine investment fees, plan expenses, investment performance, and design
Your existing or potential investment advisor will typically walk you through the analysis of your investment fees, plan expenses, and investment performance. Common discussion topics to prepare for include:
- How does the plan’s investment performance compare with various market trends? How will they compare over certain time periods such as one, three, five, and 10 years?
- Do your plan’s investment options provide sufficient investment diversification for plan participants? What asset classes are represented by the mutual funds allowed in the plan? Are some asset classes underutilized?
- What expenses are being paid from the plan and are they reasonable given the services being provided? A benchmarking report will detail various fund expenses specific to the investments within the plan. Further detail will be provided regarding the separate components of expenses in each mutual fund held within the plan.
- How do the expenses compare with similarly-sized plans? What is the long-term average of these additional expenses, and what percentage of plan assets do these represent?
Plan design considerations
- Did the benchmarking report identify any opportunities for enhancements in plan design?
- Is the plan operating in line with your objectives as the plan sponsor? Have your objectives changed?
- Can your plan design be improved to increase benefits to the business owners?
- Is business tax minimization a priority?
- Do changes to your company’s ownership or employee workforce warrant new plan design?
- What is the ability of key employees to contribute?
- Are there any recurring annual compliance testing issues?
How we can help
Periodically benchmarking your plan will help you achieve better outcomes and avoid fiduciary breaches. CLA knows qualified retirement plans. We use first-hand experiences to help you identify where your organization’s plan currently stands, and determine its future direction. Our professionals can review and analyze your plan design, expenses, and compliance testing to help you build a plan that will help you move forward.