Retirement Plan Benchmarking: ‘More Art Than Science’

How does your company’s retirement plan stack up against its peers? For Jamie Curcio, the process of evaluating and benchmarking everything from fees to employee participation is as individual as the company itself.

“There are a lot of organizations that do fee benchmarking, and it’s ‘Let me just go look in my database,’” according to Curcio, co-founder and managing partner of Deerfield, Illinois-based Curcio Webb. “There’s so many factors, and if you’re comparing a certain plan to other plans, you need to understand the complexity of both the plan that you’re trying to benchmark and the comparator plans—benchmarking is more of an art than science.”

The ongoing fiduciary requirement that plan sponsors benchmark their retirement plans to ensure they maintain competitive offerings can—and probably should—be more nuanced than merely looking at costs and investment performance. Attorneys and advisers see benefits in digging deeper to find better ways to analyze how each retirement plan is meeting its goals. At a time when automatic features abound, measuring a plan’s success in engaging plan participants must necessarily go beyond tracking plan participation rates.

Fiduciary judgment under the Employee Retirement Income Security Act plays a role in establishing the cadence of when and how to benchmark, says David Kaleda, a principal in the Groom Law Group, based in Washington, D.C. Kaleda sees most plans completing full requests for proposals to benchmark fees such as for recordkeeping and for advisory or management services every three to five years, with a planned follow-up on fees in the third year. If something significant has changed in the interim, such as if a plan merges into another plan and assets expand, he advises accelerating the timing. More broadly, Kaleda also sees plan sponsors comparing their plan design with that of their peers.

“Plan sponsors want to know what their peers are doing so they can be competitive in the employment marketplace,” Kaleda says.

Many Things to Monitor

Auto-enrollment features have also put additional emphasis on target-date fund selection, if such funds are designated as the qualified default investment alternative, Kaleda notes.

“The QDIA will hold a substantial portion of the assets of the plan, anywhere from 40% to 60%, so when an investment class holds that much of plan assets, it behooves plan sponsor fiduciaries to really look at those to make sure they’re quality investments and that the fees you’re paying are reasonable,” he says.

Kaleda also urges plan sponsors to keep informed about any conflicts of interest: “When you hire investment managers, that’s the time to find out if they have conflicts—particularly fee conflicts—and determine how they address them.”

Doug Stalter, a Cleveland-based vice president and retirement plan consultant with Oswald Financial Inc., emphasizes the importance of receiving independently sourced reports.

“Plan sponsors are more aware of some of their fiduciary responsibilities to make sure that they’re benchmarking their plan, so we are seeing that they’ve received reporting from their current adviser,” he says. “We think it’s especially important to make sure that they’re working with an independent provider to provide that.”

As part of an effort to monitor plans, Stalter benchmarks for his plan sponsor clients on an annual basis. 

“With the amount of movement and changes that we’re seeing in the retirement space right now, a lot of those conversations for us are not necessarily just benchmarking, but also helping set up the conversation of where we’re seeing movement and opportunity for growth and improvements and to support their employees,” he says. This could range from reviewing recordkeepers to improving investment options or finding new ways for advisers to engage with participants one on one.

Curcio too, sees the advantage in getting very precise in both evaluating the plan and considering the plan’s complexity. Among other things, she will consider: How many What kinds of populations does the 401(k) provider have to address? How many different cohorts and other factors such as communication and language needs are there? How many payroll systems are there?

“If we have a client and it’s very simple and they’re dealing with one benefits department and plan design is easy, that’s one end of the spectrum, and then we’ve worked with organizations that have a lot of unique requirements,” Curcio says.

Rather than merely looking at a fee range of $35 to $90 per plan participant, for example, she views a client with a very simple plan differently than a client with numerous plans, such as those with at least 10 to oversee. Curcio will also consider what the plan sponsor is aiming for, including whether might provide far better service and align with the overall goals.

“There’s a lot of variation among recordkeepers as to what’s included,” she says, pointing to two clients that have two people from their recordkeeper full-time on-site counseling employees and another client whose recordkeeper develops a custom wellness program every year. “You have to really look at the whole program.”

More Than Participation

She also advises plan sponsors to look beyond participation rates as a measure of plan success.

“One of the things that recordkeepers and plan sponsors should begin to do—for those that aren’t—is measure behavior,” she says. She recommends evaluating participant engagement with the plan and its information and education offerings.

John Lowell, a Woodstock, Georgia-based partner in October Three Consulting, also recommends plan sponsors take a step back and consider first principle questions of: What is their goal for benchmarking? What are they trying to do? How much does the plan design motivate people to save? How well do your communications influence people?

As much as possible, Lowell encourages plan sponsors who view retirement benefits as a core element of recruiting, retention and workforce management initiatives to gauge projected outcomes and be thoughtful about which of the available metrics measure that performance.

Ideally, Lowell would like benchmarking to include assessing the projected outcomes for plan participants if they continue at their current rate of savings and the plan remains the same. He then would compare that rate of success to other plans. He also would like the process to develop a broader sense of employees’ overall financial health: For instance, are they saving 10% of their pay while also running up consumer debt at the same time?

“Understanding why you have the plan and developing metrics around that reason or reasons is the right way to benchmark,” he says. “I would ask them to benchmark with purpose.”