Ever Vigilant

Even when things are going well, benchmarking is essential

According to the 2022 PLANSPONSOR Defined Contribution Recordkeeping Survey, recordkeepers provide administrative services for over $10 trillion of DC assets, with more plans coming online all the time. More than 86,000 plans were added last year alone. That does not include a growing number of state-backed plans and newly created solutions offered by fintech firms.

All of this growth is happening while the recordkeeper marketplace itself is both consolidating and offering new products and services. The rules governing retirement plans are also changing, whether that is through new Department of Labor guidance on issues such as cybersecurity or through administrative rule changes ushered in by the various iterations of the Setting Every Community Up for Retirement Enhancement, aka SECURE, Act.

Staying on top of industry changes and meeting an evolving set of plan requirements is a challenge for even the most well-resourced plan sponsor. Recordkeeper benchmarking is a process the DOL calls for, and it is meant to create a formalized process that plan sponsors can follow to make sure their plans meet current fiduciary requirements, plus are in line with current industry trends on pricing and services.

Current best practices suggest that plan sponsors should formally benchmark their recordkeeper relationship every three to five years. Benchmarking does not require that the sponsor then change venders. Indeed, data from this latest PLANSPONSOR Recordkeeping Survey shows that 61% of respondents have been with their current recordkeepers for over eight years.

It can help, however, to identify fees that fall outside of general market rates, or other deficiencies in service. Plan sponsors can then use benchmarking data as a point of negotiation with their current recordkeepers. Doing this routinely can ensure that any additional fees are documented and that a sponsor can show that it is working to stay on top of fiduciary requirements, should participants have questions or bring litigation against it.

Forms of Benchmarking

Employee Retirement Income Security Act and DOL rules compel fiduciaries to ensure that fees paid to recordkeepers meet a reasonableness standard. It is not necessarily about finding the cheapest recordkeeper; it is about weighing the needs of the plan and the services provided, and placing that total cost within the broader context of the going market rate. There are a number of ways to collect this information.

At the most basic level, plan sponsors can simply ask their recordkeeper for more data. They can also look at information on recordkeepers that is available from a number of data providers to get a general sense of fees and services offered across various platforms. These options are a lighter lift but may not meet the benchmarking requirement. Best practices call for a more formalized request for information or request for proposals process. These options will provide the most data on available services and total costs; they can be evaluated in terms of the cost and design of the present plan.

“The simple request for information can give you more reliable pricing data and is something plan sponsors can do relatively often to make sure pricing is still in line with the market,” explains Tom Kmak, CEO and co-founder of Fiduciary Decisions, a consultancy for fiduciaries and plan sponsors, in Scottsdale, Arizona. “The RFP process will give you more data, and that can be important. If your plan is growing significantly or hasn’t been updated in a number of years, or if you’re considering adding on new services, you need to be able to see where you stand.”

Relative Value

Kmak notes that RFPs can be expensive and time-consuming, because plan sponsors will often need to work with a third party to gather and coordinate all of the information. Still, the cost of conducting a solid process will be less than rendering significant plan changes or facing litigation as a result of making underinformed decisions.

“There is a tendency within the industry to focus purely on price, and that really doesn’t tell the whole story. If you end up changing recordkeepers frequently because you’re chasing price or you realize the cheap platform doesn’t have services you need, that creates a lot of disruption for plan participants,” Kmak says.

Recent litigation bears this out. The case of Ramos v. Banner Health in 2020 highlights the need to balance plan design and recordkeeping fees. Plan sponsors were alleged to have fallen behind in their monitoring of plan offerings, holding onto some that were alleged to be subpar for too long and using a revenue-sharing model that led to excessive fees.

The ruling was a mixed bag.

The judge found that the range of fund offerings and services provided were not imprudent and that dips in investment performance do not necessarily equate to fund damage. However, because the plan design failed to include the option to renegotiate fees, participants were getting overcharged: The plan could not call for adjusting prices down as the market rates fell. The result shows that, to pass a reasonableness standard, sponsors have to consider products, services and price together and ensure that agreements include the option to make changes in the future.

A more recent spate of cases involving target-date funds highlights the same point. In those cases, plan sponsors have come under attack for offering a low-cost TDF suite that, litigants argue, was chosen with price as a defining factor. The argument at the core of these cases is that choosing a product purely on price and not considering other variables such as the availability of advice or performance does not meet the suitability standard. Critics of the cases have argued that litigants are making it nearly impossible to create a plan that is prudent and/or safe from litigation.

Erik Daley, managing principal for Multnomah Group, a retirement plan consultant in Portland, Oregon, says the significant increase in litigation puts more value on the benchmarking process. “There’s a lot for plan sponsors to keep up with at the moment, and wherever they can have documentation and show they are being proactive about plan monitoring is going to be beneficial,” he says. “When we look at the recent litigation, it’s [plain] that plan sponsors need to be able to clearly defend their choices, both in terms of what they mean for a given plan but against the backdrop of how a plan design fits in with the broader marketplace of offerings.”

The RFP process may be getting slightly easier for plan sponsors in one respect. Industry consolidation means there are fewer recordkeepers to compare. There is also a measure of specialization, as some recordkeepers are designed to work with only small or midsize plans and thus may not be suitable for every process, and vice versa for mega plan recordkeepers.

While consolidation is often viewed negatively, it has some benefits within the recordkeeper space, sources say. Consolidation has brought improvements in technology, as well as new services. Recordkeepers are also working more closely with third parties, both as a result of consolidation and just as part of a broader effort to offer more services to clients. Taken together these factors are leading to service improvements without necessarily broad-based increases in cost.

For example, T. Rowe Price has entered into an agreement with technology provider FIS to improve its recordkeeping platform and to offer financial wellness services. Sponsors that work with T. Rowe will get access to an improved user experience, as well as the option to add a financial wellness program to their plans if they do not already offer one.

“Participants and plan sponsors have recognized, over the past few years, that retirement really includes much more than just having a 401(k) plan,” says Lee Stevens, head of institutional sales and consultant relations for T. Rowe’s retirement plan services division, in Baltimore. “Increasingly, plan sponsors are looking at plan design within the broader context of retirement preparedness, which can include financial wellness services and other benefits,” she says.

“Recordkeepers have responded to this,” Stevens continues, “not just as a function of consolidation—though that may be one way these improvements are made—but also as a function of what’s going on in the industry today. There’s a recognition that we all need to do more about supporting the financial lives of individuals.”

Multnomah’s Daley agrees. He says, as the recordkeeping industry continues to modernize and rules continue to evolve, it is important to make sure these changes are reflected in the benchmarking process. “When we think about what effective monitoring looks like, we try to take all of these factors into account,” he says.

“Anytime you have changes, that also introduces a new set of questions about prudence,” he adds. “If you’re considering new issues such as technology improvements or financial wellness programs, it can be hard to place them in a historical context because financial wellness didn’t exist 10 years ago. So it becomes much more important to have a formal process for comparing offerings so you come away with something that meets the reasonableness standard.”

These innovations can also highlight platforms that are failing to keep up, and that may mean those plans should consider a change. Even if a financial wellness program, for example, does not make sense for a given plan, most participants expect a modernized online platform that includes robust cybersecurity protections—and so does the DOL, based on recent guidance. Benchmarking can help highlight where platforms sit on the continuum of those services as well.

Future-Proofing

As the retirement industry continues to evolve, benchmarking may also help plan sponsors future-proof their offerings. Product innovation and legislative support are lining up to bring decumulation solutions to retirement plans in the not so distant future. These would be a significant new addition to ERISA plans and could help participants handle lifetime retirement income. But adding in those products will require significant updates to recordkeeping platforms and plan design to accommodate.

“When we look at what’s available for lifetime income right now, much of that is handled in the annuity space,” explains Al Otto, national director of plan governance solutions at adviser Verity Asset Management in Atlanta. “Annuities are insurance products, so aligning that with ERISA requirements will mean rule changes. Plan sponsors are also going to have to look closely at how those products are created and what the total cost is. That’s going to be difficult because insurance companies typically do not provide historical performance or historical total cost, both of which you need for evaluation. There is much less transparency” he says.

Stevens says it is important not to understate the role of the recordkeeper in the decumulation phase, as well. “As products get created and come to market, recordkeepers will be tasked with getting those on platforms and providing necessary information to plan sponsors and participants. So there’s a lot of work that will happen on the recordkeeper side, as well,” she says. “The work that recordkeepers have already done on some recent innovations can be a helpful guide about how that process might go.”

Both Otto and Stevens note that decumulation solutions are likely to be the next significant evolution in retirement, and plan sponsors should be thinking about how that fits into plan design, sooner rather than later.

“There has been substantial work on this over many years, and it’s much closer to being offered than I think many people realize,” Stevens says. “We’re at an interesting point in the cycle, where the industry is really coming together to put retirement in a broader context, and there’s an opportunity for plan sponsors, recordkeepers and investment firms to work together to keep making improvements. That’s beneficial from a fiduciary standpoint because plan participants are getting more out of the plan. But it also requires deeper analysis of plan needs so that any changes are still in the best interest of the plan’s participants.” —Bailey McCann