Benchmarking a 401(k) retirement plan refers to how a company assesses their plan’s design, fees, and services to ensure they meet industry and ERISA standards.
Benchmarking 401k plans is important for a few reasons. First, the company offering the plan needs to be confident that they are acting in the best interests of employees who participate in the 401k plan. And because acting in the best interests of plan participants is part of an employer’s fiduciary duty, benchmarking can help reduce an employer’s liability if fiduciary standards aren’t met.
If your company’s plan isn’t meeting industry benchmarks, it may be wise to change plan providers. You can start by learning how benchmarking works and why it’s important.
How 401(k) Benchmarking Works
While a 401k is a convenient and popular way for participants to invest for retirement, the company offering the plan has many responsibilities to make sure that its plan is competitive. That is where 401k benchmarking comes into play.
An annual checkup is typically performed whereby a company assesses its plan’s design, evaluates fees, and reviews all the services offered by the plan provider. The 401k plan benchmarking process helps ensure that the retirement plan reduces the risk of violating ERISA rules. For the firm, a yearly review can help reduce an employer’s liability and it can save the firm money.
ERISA, the Employee Retirement Income Security Act, requires that the plan sponsor verifies that the 401k plan has reasonable fees. ERISA is a federal law that mandates minimum standards that retirement plans must meet. It helps protect plan participants and beneficiaries.
The Importance of 401(k) Plan Benchmarking
It is important that an employer keep its 401k plan up to today’s standards. Making sure the plan is optimal compared to industry averages is a key piece of retirement benchmarking. It’s also imperative that your employees have a quality plan to help them save and invest for retirement. Most retirement plan sponsors conduct some form of benchmarking planning, and making that a regular event — annually or even quarterly — is important so that the employer continuously complies with ERISA guidelines.
Employers have a fiduciary responsibility to ensure that fees are reasonable for services provided. ERISA also states that the primary responsibility of the plan fiduciaries is to act in the best interest of their plan participants. 401k benchmarking facilitates the due diligence process and reduces a firm’s liability.
How to Benchmark Your 401(k) Plan: 3 Steps
So how exactly do you go about benchmarking 401k plans? There are three key steps that plan sponsors should take so that their liability is reduced, and the employees get the best service for their money. Moreover, 401k benchmarking can help improve your service provider to make your plan better.
1. Assess Your 401(k) Plan Design
It’s hard to know if your retirement plan’s design is optimal. Two gauges used to figure its quality are plan asset growth and the average account balance. If workers are continuously contributing and investments are performing adequately compared to market indexes, then those are signs that the plan is well designed.
Benchmarking can also help assess if a Roth feature should be added. Another plan feature might be to adjust the company matching contribution or vesting schedule. Optimizing these pieces of the plan can help retain workers while meeting ERISA requirements.
2. Evaluate Your 401(k) Plan Fees
A 401k plan has investment, administrative, and transaction fees. Benchmarking 401k plan fees helps ensure total costs are reasonable. It can be useful to take an “all-in” approach when assessing plan fees. That method can better compare service providers since different providers might have different terms for various fees. But simply selecting the cheapest plan does not account for the quality and depth of services a plan renders. Additional benchmarking is needed to gauge a retirement plan’s quality. Here are the three primary types of 401k plan fees to assess:
• Administrative: Fees related to customer service, recordkeeping, and any legal services.
• Investment: Amounts charged to plan participants and expenses related to investment funds.
• Transaction: Fees involved with money movements such as loans, withdrawals, and advisory costs.
3. Evaluate Your 401(k) Provider’s Services
There are many variables to analyze when it comes to 401k benchmarking of services. A lot can depend on what your employees prefer. Reviewing the sponsor’s service model, technology, and execution of duties is important.
Also, think about it from the point of view of the plan participants: Is there good customer service available? What about the quality of investment guidance? Evaluating services is a key piece of 401k plan benchmarking. A solid service offering helps employees make the most out of investing in a 401k account.
Investing for Retirement With SoFi
Investing for retirement is more important than ever as individuals live longer and pension plans (a.k.a. defined benefit plans that offer a steady payout) are becoming a relic of the past. With today’s technology, and clear rules outlined by ERISA, workers can take advantage of inexpensive, high-quality 401k plans to help them save and invest for the long term.
For the company offering the plan, establishing a retirement benchmarking process is crucial to keeping pace with the best 401k plans. Reviewing a plan’s design, costs, and services helps workers have confidence that their employer is working in their best interests. Benchmarking can also protect employers.
If your company already has a 401k plan that you contribute to as an employee, you might consider other ways to invest for retirement. You can learn more about various options — for example, investing in an IRA with SoFi. You can help grow your retirement savings with a SoFi IRA by opening a Roth or traditional IRA.
FAQ
What does it mean to benchmark a 401k?
401k benchmarking is the process of reviewing and evaluating a firm’s retirement plan to insure that it meets industry and ERISA standards. It is a due diligence process to ensure that the plan provider is living up to their duty as fiduciaries.
In addition, with a changing investing and retirement planning landscape, it’s important to keep a 401k plan up to date. Benchmarking a 401k plan includes looking at the plan’s design, various service providers, the investment lineup, and fees.
How should you structure your 401k?
A 401k should be structured so that it addresses several key points.
• Determining who is eligible for the plan is one place to start, by setting a minimum age or length of employment.
• Automatic enrollment with auto-escalation features can be good features to include.
• Offering a Roth option is another consideration for your 401k plan.
• Another important piece of your plan that employees must know about is how the company matching contribution works, if there is one.
• Last, structuring a vesting schedule can vary by plan — and the vesting process you choose may help attract or retain workers.
How do I check my 401k performance?
You can use online tools that measure investment performance. A vendor can help conduct 401k benchmarking processes, such as identifying and selecting plan funds, but some might not come cheap. Employers should make sure that their investment lineup has quality funds with reasonable expense ratios so that participants can achieve a decent rate of return. 401k fee benchmarking can help ensure that is the case.
The average rate of return for 401k plans from 2015 to 2020 was 9.5%, according to data from retirement and financial service provider, Mid Atlantic Capital Group. Employers have a fiduciary responsibility to pay only reasonable fees within its 401k plan.
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