Understanding 401k Benchmarking: Importance & Benefits

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When you established your company retirement plan, you were likely looking to provide an excellent employee benefit to your current employees. As well as offer something to help attract and retain some of the top talent in your industry.

It's important to note that with establishing the plan comes the responsibilities of a plan sponsor. Once the plan is set up, it is essential to maintain it regularly. This process is known as benchmarking.

What is 401k Benchmarking?

Benchmarking your 401k plan is a process of evaluating your company's retirement plan. The evaluation is necessary to ensure that you understand what plan fees are being charged and why. It will also enable you to have confidence that you are providing an excellent employee benefit. By taking the time to review, you will ensure that your current plan remains the right fit for your company and plan participants.

Benefits of 401k Benchmarking

There are several benefits to benchmarking your company retirement plan, both for your employees and for you.

There are a multitude of different fees involved with the administration of a retirement plan. It is essential to regularly review the various fees and fee amounts you are paying on behalf of your employees. There may be ways to reduce costs. This will allow more money to remain as an investment in your employee's futures.

As the plan sponsor, you have the responsibility of ensuring your company's plan administration complies with the law. You should set aside time to review your company's benefit plan at least every year. Take the time to evaluate, and you'll ensure that the plan administration complies with the Employee Retirement Income Security Act of 1974 (ERISA). Benchmarking your plan will allow you to have confidence and peace of mind that you are operating according to the law.

Keeping in mind what first prompted you to establish your company's retirement plan, it is critical to regularly review your plan to ensure that you provide an exceptional benefit to your employees. This assessment can be invaluable to your company. It helps your employees know they are valued, resulting in a boost in morale, productivity, and retention rates.

How to Benchmark Your 401k Plan: The Process

Once you have determined that it is time to evaluate, you should contact a financial advisor to assist you. There are three main categories to be assessed when benchmarking your defined contribution plan: design, fees, and services.

Taking these essential pieces of the plan into account, your financial advisor will help you determine your plan's current status. They will then guide you in comparing it to both your goals and other plan options. This insight will allow you to determine if changes need to be made to any part of your plan.

Once you have determined that it is time to evaluate, you should contact a financial advisor to assist you. There are three main categories to be assessed when benchmarking your defined contribution plan:

1. Plan
design

2. Plan
Fees

3. Plan Services

Taking these essential pieces of the plan into account, your financial advisor will help you determine your plan's current status. They will then guide you in comparing it to both your goals and other plan options. This will allow you to determine if changes need to be made to any of the above categories.

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1. Assess Your 401k Plan Design

During a design assessment, it is necessary to understand your end goal for the plan. If you do not already have this established, determining the goal will be your first step. Once this is in place, you can begin to ask questions that will help you discover whether the current design is suitable or needs some changes.

These questions include which employees are eligible to join the plan based on their age, amount of time with the company, and whether they are set up for automatic enrollment. After answering the appropriate questions for your plan design, you will be able to re-align it with your goals.

2. Evaluate Your 401k Plan Fees

It is critical to review both what fees and how much fees are being paid. This will help you to ensure you are paying a reasonable rate for the management of your plan.

Keeping this in mind, there are two different types of administration fees: administration services and investment management:

  • Administration services fees include charges for revenue sharing and other services. They also cover holding plan assets in trust and record-keeping for participant contributions, earnings, and investments. Evaluating and redesigning plans to ensure ERISA compliance are also included in these fees.
  • Investment management fees include charges for services such as managing each plan fund in accordance with the objective. They also cover expert advice on investment options to the plan sponsor and participants.

All of these fees will impact the overall fund expense ratios for the plan investments. Each company and each employer handle fees differently. It is worth looking at the industry standard to ensure you are not charging too much or too little to manage your plan's portfolio.

What is Benchmarking
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3. Evaluate Your 401k Provider's Services

It's essential to have a recordkeeper who is suitable for your plan. Proper documentation is necessary for staying in compliance with ERISA law. Therefore, you should know that not all record-keeping services are made equal. Even within the same company, recordkeepers and services can have a range of tiers available to you and your employees.

When looking for a suitable service provider, ask questions about their offerings, prices, and discounts. It is essential to be clear about what you are paying and why. Assessing whether your record-keeping services are worth the cost is a way to ensure unnecessary fees don't accumulate. It also allows you to make sure your employee accounts are under the best management possible.

It is your responsibility as a plan sponsor to ensure these benchmarking evaluations are taking place. Documenting each one and having them available for review is crucial.

By performing and recording these evaluations, you will protect yourself from a potential breach of responsibilities. If the portfolios in your care experience loss due to a violation, you could find yourself personally liable for the mistakes. This error could result in you being responsible for reimbursing lost earnings.

Interested in Benchmarking?

At Benchmark My Plan, we have cultivated long-term relationships with an extensive network of financial advisors who are experienced in assessing 401k plans. Our goal is that you receive assistance with both benchmarking and establishing a plan for the next steps based on the result of the assessment. Are you ready to benchmark your plan for free? Our experienced professionals are prepared to meet with you as soon as possible.

Interested in benchmarking your company retirement plan, but still have some questions? We have put together resources specifically to assist plan sponsors like you, ensuring they receive maximum benefits from evaluating their plan. Check out our FAQs, where we cover questions about your responsibilities as a plan sponsor, potential pitfalls, and how we support you free of charge.

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