If your organization sponsors a 401(k) or similar qualified plan, you’re undoubtedly familiar with the inevitable fees that accompany plan administration. The question is: Are you paying too much for them?
In October of last year, Abernathy Daley 401k Consultants analyzed the IRS Form 5500 filings of 6,566 companies with 100 or more employees. Their research found that nearly 80% of responding employers are overpaying on 401(k) or 403(b) plan administrative fees.
The risks associated with paying too much for such fees are serious. You may not only be weakening your own cash flow, but if plan participants find out about it, they could file a lawsuit. One way to address this challenge is to conduct a retirement plan benchmark analysis.
Two-fold objective
In a nutshell, a retirement plan benchmark analysis compares the fees, services and investment performance of your 401(k) with current industry standards for similar plans. This analysis can also be performed for other plan types, such as 403(b)s, 457s and defined benefit plans (pensions).
The objective of a benchmark analysis is two-fold. First, you’re looking to determine whether your plan is cost-effective — particularly regarding the fees you’re paying. Second, you want to generate solid evidence that you’re fulfilling your fiduciary duty as plan sponsor, as well as plan administrator, if your organization fulfills this role.
Of course, the two things are interrelated. Someone could argue that overpaying for administrative fees or engaging a subpar third-party administrator is a breach of your fiduciary duty. In turn, this might lead to legal action against you or, at the very least, result in disgruntled plan participants — which can lower morale and negatively affect employee retention.
5 general steps
Many employers lack the internal expertise and resources to conduct a retirement plan benchmark analysis. So, they engage outside specialists to do so. To give you an idea of what to expect if you decide to undertake an analysis, here are the five general steps involved:
1. Data collection. The person or team conducting the analysis will identify and chart all plan-related costs. These typically include administrative fees, investment expenses and consulting fees. If your organization uses a third-party administrator, you’ll need to request a detailed report from your provider.
Important: Some third-party administrators offer benchmark analysis as part of their suite of services. Be sure to look into this before engaging a consultant.
2. Comparative fee analysis. The person or team will then compare the data collected with industry standards to determine whether your plan fees align with those of similarly sized employers and plans. Generally, standards are derived from reliable sources such as rules and guidelines issued by federal agencies, as well as studies, surveys and reports from trade associations, other industry groups, and third-party administrators and financial advisors.
3. Service and performance evaluation. An analysis usually also assesses the quality of your plan’s investment options, educational resources, required disclosures and participant support. These should all fulfill commonly accepted industry expectations.
4. Recommendations. Typically, the person or team conducting the analysis will make recommendations based on their findings. Suggestions might include negotiating lower fees with your current plan provider, exploring the feasibility of changing providers, improving investment options or strengthening fiduciary compliance.
5. Documentation. You should receive a written report of the analysis. It will include all the data gathered and detailed descriptions of the recommended next steps. This can be an invaluable document for guiding plan improvements, defending yourself against claims and comparing the analysis in question with future ones.
Swift action
Your organization would presumably take swift action if it discovered it was overpaying for utility services or office supplies. This same logic should apply to your 401(k) plan. Regularly conducting a retirement plan benchmark analysis can help protect your financial interests and enhance participant satisfaction. Please get in touch with us for help with an analysis or with any other aspect of managing the costs of your plan.
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