According to the American Benefits Council, 401(k) plans are the most popular type of employer-sponsored retirement plan in the nation. In fact, 99 percent of employers who responded to the Verisight and McGladrey Compensation, Retirement and Benefits Trends Survey indicated they now sponsor a defined contribution plan. A WorldatWork survey even found that 88 percent of companies offering a 401(k) with a matching benefit continued to match employee contributions during the recent recession.
While 401(k) plans can produce meaningful retirement benefits, the overall success of any organizations’ employer-sponsored retirement plan is determined by its quality. It’s important to benchmark your program regularly against market norms for many reasons, including the following:
Benchmarking is required by law – Employers must monitor the cost of any 401(k) program they offer according to the Department of Labor. A benchmarking report will include an analysis of all the fees associated with the program, enabling you to compare them to market norms.
Benchmarking is usually free – Your 401(k) benefit advisor should be able to create a benchmarking report or contract with a third party to produce one for you free of charge. Worst case scenario, you can enlist the assistance of an independent third-party provider to conduct the benchmarking process for a reasonably small fee.
Benchmarking protects your employees – Benchmarking reports should include information on 401(k) plan complexity, participant (employee) fees and participant (employee) success in addition to a detailed accounting of employer fees. Unreasonable fees charged to plan assets (participant accounts) by investment managers, administrators and record keepers can quickly eat into retirement earnings. Even 1 percent in unnecessary costs can suck hundreds of thousands of dollars out of plan balances over time.
Benchmarking protects your company – A lack of due diligence can lead to expensive audits and even lawsuits. According to the Department of Labor, 75 percent of the 401(k) plan audits conducted last year resulted in fines, penalties or reimbursements. Several groups of 401(k) plan participants have been successful in securing legal victories over their employers for failure to address excessive fees associated with their retirement program. Maintaining a file of 401(k) benchmarking reports illustrates your intention of exercising due diligence in regards to administrative and investment management fees and expenses.
Benchmarking has become a standard – Retirement plan fees are continually changing. If you want to stay on top of the costs associated with your employer-sponsored 401(k) program, annual benchmarking is definitely time well spent.
In addition to regular benchmarking you may want to periodically request bids from at least three 401(k) service providers or ask your benefits plan advisor to do so. Analysis of competitor bids will allow you to make an informed decision on the quality of the retirement plan you’ve sponsored for your employees and make adjustments as necessary.