The Why, What and How of Plan Benchmarking

Plan fees matter. According to Callan’s 2024 DC Trends Survey, two-thirds of plan sponsors were either somewhat or very likely to conduct a fee study in 2024.

Most respondents also indicated they were very or somewhat likely to review fee types, including managed account service fees and indirect revenue. Half were likely to move to lower-cost investment vehicles (e.g., move from an R6 share class to a collective investment trust) in 2024, a notable increase from the 2023 survey (42%). Scrutinizing fees paid off: Nearly half of plan sponsors reduced fees after benchmarking.

Fee Benchmarking Matters

Sponsors are required to monitor and evaluate plan fees. Brian White, a partner in and senior consultant with Fiducient Advisors, notes that fiduciaries are responsible for ensuring that the services provided to their plans are necessary and that the cost of those services is reasonable.

“At no point does [the Employee Retirement Income Security Act] suggest that plan sponsors must have the lowest fees, but ERISA fails to define ‘reasonable’, as well,” says White. He adds that an annual exercise to put some guardrails around reasonableness through comparative benchmarking is a prudent part of the fiduciary process.

Christopher Dall, managing director for retirement solutions at the PNC Financial Services Group, cites several additional reasons for benchmarking. The first is to defend against litigation claims that a plan’s fees are excessive. In recent years, he says most cases have focused on plan fees and whether they are reasonable for the services provided.

Another reason is that less expensive investment options like collective investment trusts have become more widely available.

“It’s easy without fee benchmarking to get caught offside when you’re on a legacy pricing schedule—none of the vendors proactively lower your fees for you,” says Dall. “You have to benchmark and price the market, and if you don’t do so, you could end up [paying] anywhere from 50% to 100% over the market for similar plans receiving similar services.”

Controlling fees also benefits participants, Dall adds, citing analyses showing that plan fee reductions can substantially improve participants’ retirement balances.

What to Benchmark

As fiduciaries, sponsors primarily focus on fees paid from plan assets, according to Joe Valletta, publisher of the 401k Averages Book, which tracks plan fees. Investment costs usually account for the largest percentage of total plan costs, followed by recordkeeping and adviser costs.

Jamie McAllister, a senior vice president and defined contribution consultant with Callan, says sponsors should focus on “all-in” fees. This definition includes every administrative expense charged to the plan, not just the more obvious investment, recordkeeping and administrative costs. She cites the example of a plan that uses an external custodian instead of its recordkeeper: “We want to make sure to include that trust custody piece within the all-in fees.”

Dall maintains that calculating all-in fees can be challenging when plans use recordkeepers’ proprietary investment funds or investment share classes with revenue-sharing arrangements. Although disclosures under Section 408(b)(2) of ERISA can increase fee transparency by informing the sponsor about a vendor’s direct and indirect charges, it is not always a clear case.

“When you look at those disclosures, however, it’s not simple, it’s not easy,” says Dall. “They don’t often just come out and say, ‘We made X dollars on your plan.’ A lot of them will have formulas where you have to do the math and calculate the total compensation yourself.”

Benchmarking Methods

Plans can choose from several methods to benchmark their fees. Data from sources such as Fiduciary Decisions and the 401k Averages Book are available for purchase. Larger plan consultants often maintain internal fee-tracking databases based on their clients’ plans and publicly available information.

Jennifer Doss, the defined contribution practice leader at CAPTRUST, explains that circumstances influence the timing and scope of fee benchmarking. For example, if a plan’s recordkeeper consolidates with another recordkeeper, that would likely trigger a benchmark review.

A first-level review uses CAPTRUST’s internal fee database. The company works with about 3,200 defined contribution clients and annually conducts roughly 700 benchmarking projects, and that activity generates numerous data points.

“So we have a good sense of what a low, mid and high range for recordkeeping fees should be by plan size and average account balance,” Doss says.

The next level of a fee review involves approaching four to six providers to solicit specific bids. CAPTRUST supplies specific information about the plan, allowing providers to respond with detailed bids. CAPTRUST then takes those bids to the plan’s committee for review and evaluation.

McAllister also notes that plans are not required to have the lowest fees relative to comparable plans. Generally, though, after a benchmarking exercise, she likes to see a plan’s fees below the average or at the lower end of the range.

“But of course, we want to factor services into that too, and can justify fees being a little on the higher end always,” she adds.