Benchmarking Beyond Just Looking at Fees

Plotting the best course for plans in a competitive labor market

Among the many changes that Judy Bobilya-Feher, chief financial officer of Aunt Millie’s Bakeries, has seen in her 31 years on the company’s retirement committee is a significant change in approach to benchmarking.  

The business, headquartered in Fort Wayne, Indiana, used to rely very little on benchmarking beyond the regulatory requirements. In the past decade, though, it has greatly expanded not only the frequency of its benchmarking activities but also the scope of features it benchmarks in both its union and nonunion plans.  

Rather than do holistic benchmarking every few years, Aunt Millie’s benchmarks its plans on a rolling basis, looking at a few different factors at a time. Most recently, the company benchmarked the plans’ age requirement, contribution cap and the amount of time before employees become eligible to enroll. Based on the findings, next year employees as young as 18—down from 21—will be able to participate, there will be no contribution cap, and new employees will be eligible for an employer match after
30 days, vs. previously one year. 

“We don’t necessarily want to be the leader on everything, but we want to move from further behind to right behind the leaders of the pack, so we can watch how other companies are adapting,” Bobilya-Feher says.  

Aunt Millie’s Bakeries is not the only company using benchmarking to learn where to best spend its employer money. While plan sponsors still benchmark for low fees, the benchmarking process has expanded in scope to look more broadly at the plan and how it can help the employer meet its objectives. 

While in the past, best practice may have been to benchmark a plan every seven to 10 years, most plan sponsors do so more frequently today. One factor driving this is ongoing consolidation among recordkeepers, which has led to changes in their business models. According to the 2022 PLANSPONSOR Benchmarking Survey, 55% of respondents benchmark their provider annually, and 11% every one to two years.  

“After a merger, some things might be outsourced that weren’t before, the indexes might have changed and the technology might be different,” says Holly Verdeyen, U.S. defined contribution leader at Mercer in Chicago. “As the big plans keep getting bigger, more frequent reviews are warranted.” 

Mergers and acquisitions have become so frequent that one factor OneDigital Retirement Services considers when evaluating recordkeepers for clients is whether that recordkeeper is a likely acquisition target.  

“We look at the staying power or longevity of recordkeepers,” says Travis Power, a senior consultant with OneDigital in Leawood, Kansas. “We want the recordkeeper to get through the next three to five years before we do the process again.” 

Besides these consolidations, significant turnover at employers’ executive level and on plan sponsors’ plan committees has also boosted the frequency of benchmarking.  

But the look of plan design benchmarking will often vary, depending on the company’s industry, size and the goals set out in the investment policy statement, if the company has one. 

“When it comes to participant behavior, employers will be at different places along the spectrum,” says Rob Austin, vice president, head of research at Alight Solutions in Cornelius, North Carolina. “For example, one employer might want to increase participation, because getting people into the plan is important. However, another plan with high participation might be focused on increasing savings, improving diversification or decreasing leakage.”

Metrics Matter

The demographics of the plan may also affect the metrics used in benchmarking plan design. An employer focused on attracting new college graduates, for example, might explore changing its 401(k) to incorporate a student-loan matching program, Austin says. An employer with an emphasis on diversity, equity and inclusion initiatives might want to benchmark participant behavior based on race or ethnicity. 

Plan demographics also play into understanding benchmarks, Austin says. Rather than concentrating on averages, plan sponsors and their advisers can dig into the data to study performance by age, race, gender or tenure to make comparisons with participant peer groups in other plans.  

Considering the plan’s performance toward its objectives and participant progress toward outcomes can make the benchmarking process more meaningful. It might be a mistake, for example, for a sponsor to focus only on its 401(k) match and ignore other retirement benefits, such as a defined benefit plan or a nonelective contribution, Austin says.

Peer Comparisons

Besides looking at industry averages, it is critical to benchmark the plan against peers that draw from the same labor pool. 

“From a plan design perspective, it’s important, because workers are always going to evaluate different places to work within their industry,” Austin says. “Plan sponsors don’t want to be too far behind their competitors, because that runs the risk of not attracting and retaining the best talent.” 

Participation, engagement levels, match rates and eligibility are among the most common metrics plan sponsors consider when comparing their plans with other employers. And plan sponsors are willing to pay more to a recordkeeper that can outperform on those benchmarks, Austin adds. 

“They are really focused on retaining good employees and how they can make their plan more attractive than the next guy’s,” says Power. “Benchmarking is one way to make sure your plan is supercompetitive.” 

In a volatile market, benchmarking can also help put plan performance in perspective. “It’s generally a bad thing to see the plan’s average balance drop by 5% from the prior year,” Austin says. “However, if everybody else’s dropped by 15%, the 5% doesn’t look so bad.” 

The benchmarking process increasingly includes a look at the technology that recordkeepers or advisers use. It has become more common for plan sponsors to ask about payroll integration, preferring vendors that can automate that part of the process, and query whether a recordkeeper can access additional participant assets from other recordkeepers, for instance.  

Plan sponsors also ask for more details about recordkeepers’ and other vendors’ cybersecurity systems and processes, following on guidance from the Department of Labor last year that added taking cybersecurity measures to fiduciaries’ responsibilities. 

Each year, the PLANSPONSOR Defined Contribution Best in Class Awards program measures recordkeeper services based on responses to our annual DC Survey. Our 2022 list of recordkeepers (see pages 25 through 27) is broken down by sponsor asset size and compares them as to 12 different categories of offerings.

Looking for Values

Basic fee benchmarking, for many plans, has become part of the annual review process, documenting that they regularly review their fees. More than 40% of plan sponsors surveyed by PLANSPONSOR said they benchmark plan fees annually. 

But when considering fees, sponsors increasingly look for the plan that offers the most value. “Since the market has been in the red, employers are focusing on the bottom line,” Austin says. “They want to maximize the ROI [return on investment] they have on their retirement spend.” 

That means asking about value-added financial wellness services and programs, as well as whether in-plan funds reflect the lowest-available share class. “That’s a difficult exercise,” Verdeyen says. “There’s a lot of analysis that needs to be done for each plan, because it’s all relative to the plan-specific menu.”

New Challenges

As plan sponsors increasingly offer personalized products such as managed accounts and lifetime income solutions, best practices have evolved to measure their performance. Performance benchmarking of all types of accounts should take a longer-term perspective to smooth out the impact of volatility. The process should reveal improved performance over time, Verdeyen says.  

“Managed accounts don’t have a large peer group, and they’re tailored to each person,” she says. “So you can’t look at the median performance of the peer group.” 

The best approach in that case, she says, is to look at the different cohorts of the plan—people of similar age in five-year bands—and then benchmark that group against a plan-objective metric, such as income replacement or retirement readiness. 

“We’re going to get more specialized benchmarks going forward,” Verdeyen says. “We will also see more ability to benchmark collective investment trust funds through data bases. Right now, it’s easy to get mutual fund information because it’s publicly available, but CITs are not publicly available through prospectus.” 

Besides benchmarking their recordkeepers, plan sponsors should also benchmark advisers, third-party administrators and any other vendors associated with the plan. 

“There’s a common misconception that you have to make changes to the plan after benchmarking,” Power says. “You don’t need to make changes. It’s just a good fiduciary practice to benchmark and show that you have a prudent process. —Beth Braverman