The Why, What and How of Plan Benchmarking

A review of some of the methods and mechanisms retirement plan sponsors can use to determine how their plan’s costs measure up.

 

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.

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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.

More on this topic:

An Accurate Measurement of Retirement Readiness Means Looking Beyond Averages
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2025 DC Survey: Plan Benchmarking

An Accurate Measurement of Retirement Readiness Means Looking Beyond Averages

Frequent plan benchmarking is a useful way to measure participants’ retirement readiness, but a deeper analysis of demographics and financial wellness is key to developing the full picture.

Understanding the full picture of whether participants are on track for retirement is not as simple as looking at savings rates or retirement plan investment fees.

Comprehensive plan benchmarking, as well as leveraging recordkeeping platforms and wellness tools that consider the totality of a participant’s assets, is vital when gathering metrics and data to fully understand participants’ retirement readiness.

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Mark Smrecek, senior director of retirement at WTW, says measuring retirement readiness in a given population is dependent on the organization’s delivery of retirement benefits. If the company, for example, has a legacy defined benefit plan, a defined contribution plan and other intermediate plans like a health savings plan, Smrecek finds that often a single metric focused on one pillar of benefits delivery “leaves a lot of information out.”

“We have started to move past this notion of looking at [the] savings rate as a benchmark for how well-prepared people are for retirement,” Smrecek says. “We’ve moved to [looking at] a metric that looks at the account balance as a percentage of pay alongside the savings rate.”

He says this metric allows the plan sponsor to see the value of savings that is already accumulated, plus the ongoing savings, which shows how the employee is contributing to the plan.

“The two in combination tell a much richer story, because what we found is that when employees are behind in their retirement savings at age 50 or 55, they may boost up their savings to a level that is, say, 15% or 20% of pay,” Smrecek says. “To the extent that we assume that’s what they’ve been contributing their whole entire career, we overstate the employees’ retirement readiness level.”

Looking Beyond Averages

Smrecek emphasizes that it is also important for employers to look at balances on an individual level, as opposed to focusing on plan averages. He has found that plan averages tend to obscure a lot of the opportunities an employer has to improve the plan.

Collecting demographic data is also essential when contextualizing retirement readiness, Smrecek says. Whether it’s looking at age demographics, gender or ethnicity, this can help employers have a clear view of how to engage employees in improving their retirement readiness.

Tom Armstrong, vice president of customer analytics and insight at Voya Financial, agrees that it is important to look beyond plan averages but suggests that leading indicators of successful plan outcomes still include participation rates, savings rates and income replacement. But even if a plan has a 90% participation rate, Armstrong says plan sponsors still need to “go deeper” to understand who might be getting left behind.

“We encourage plan sponsors to give their recordkeepers and advisers as much data as they can,” Armstrong says. “And those data sets would be things like salary, race, ethnicity and gender, so that we can really provide those richer insights back to the plan sponsor about how to optimize plan design.”

Armstrong emphasizes that “no two employers look the same,” and that while high-level benchmarking across the industry is helpful, it is important to benchmark against regional and local competitors.

Leveraging Recordkeeper Technology

Shelby John Enderwitz, executive vice president of human resources at Central Bank, based in Houston, says J.P. Morgan, the plan’s recordkeeper, offers a helpful dashboard that measures the retirement readiness of employees. She says the dashboard shows the likelihood of employees replacing 75% of their pre-retirement income.

Enderwitz says 20% of participants at Central Bank have already achieved this objective, and 74% of the population is “on track” to accomplish the goal. About 26% of the employees are not on track, so Enderwitz says a lot of the company’s communications around financial wellness and education are targeted toward that cohort of employees.

However, she notes that the J.P. Morgan platform does not account for other assets a participant may have, unless they have added the information themselves.

“We don’t find that a lot of participants put in their outside information,” Enderwitz says. “For some of them, it’s a fear that we will have unnecessary access to their assets, which of course, we don’t have any access to it; it’s just visibility… And then otherwise, some people just don’t take the time to do it, or don’t necessarily see the value in doing so.”

Enderwitz says part of the education that her team provides is intended to help participants to understand that inputting additional information into the recordkeeping platform can help them to see a more accurate picture of their own retirement readiness, and in turn, adjust their savings accordingly.

Central Bank typically conducts plan benchmarking on an annual basis, and Enderwitz says it is a particularly beneficial exercise when evaluating plan design. For example, earlier this year, the company did a benchmarking exercise comparing the company’s automatic enrollment rate and company match against its competitors in the regional and community banking space.

Enderwitz says Central Bank found that its overall contribution rate is equal to, or even superior to, most of its competitors. The company automatically enrolls participants at an 8% default deferral rate and participants are 100% vested in the plan from day one. Central Bank matches 50% of contributions up to the 8% deferral rate.

“We think our decision to stretch our match to the higher deferral level has enabled us to achieve a higher income replacement ratio by encouraging employees to defer more and setting that automatic enrollment contribution to 8%,” Enderwitz explains.

Delving into Financial Wellness

Enderwitz says the company also conducts a financial wellness survey on an annual basis, which asks about how much emergency savings employees have, as well as how they feel about their retirement readiness and what obstacles they are facing that are preventing them from saving, or saving more, for retirement. While these surveys are anonymous, Enderwitz says the results are published and the company offers education opportunities, as well as one-on-one conversations with an adviser, which is paid for by the company.

Armstrong adds that it is also important for plan sponsors to look closely at hardship withdrawal and plan loan rates when benchmarking. According to Voya research, people who do not have adequate emergency savings are 13 times more likely to take a hardship withdrawal. Because the second-leading cause of hardship withdrawals is unreimbursed medical expenses, Armstrong says benchmarking can also reveal a need for benefits outside of retirement, such as a health savings account.

“We really ask plan sponsors to zoom out to better understand what other potential risks and pressures are at play so [they] can ultimately go back and design that optimal retirement plan,” Armstrong says. “It starts with, let’s get as much foundational demographic data from the sponsor, but then let’s also make sure that we’re pulling insights from the various places that we potentially can collect those other data sets, like outside assets [and] broader financial wellness and sentiment, so that we can stitch together that multi-dimensional picture for the plan sponsor or the adviser that they’re working with.”

More on this topic:

Retirement Plan Benchmarking: ‘More Art Than Science’
The Why, What and How of Plan Benchmarking
2025 DC Survey: Plan Benchmarking

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