Benchmarking a retirement package should include a number of different metrics — not just fees — and that’s where many employers fall short.
“The whole idea behind benchmarking is to give you a sense of where you are, the problem areas that you need to work on and what techniques you should then use to improve the metrics for the plan,” says Daniel Halle, AIF®, RPA®, vice president and manager of Retirement Plan Advisors at Fragasso Financial Advisors.
From a fiduciary perspective, you want your fees in line with the market, but you also want to benchmark the performance of your funds, which can drive cost. If you’re running more of an index strategy, the costs may be lower but returns could be lower over the short term.
It’s also critical to consider participant outcomes, including employee participation rates, deferral rates, proper asset allocation and amounts saved. Remember your employees are why you set up a retirement plan in the first place, Halle says.
Smart Business spoke with Halle about how to benchmark your retirement package and then use that data to improve the plan.
If benchmarking isn’t required, why do it in the first place?
There’s no obligation to benchmark your retirement package, but you’re doing a disservice to your employees if you don’t.
It’s also good business. As a fiduciary, you must act in the best interest of the participants. If you don’t review or benchmark your fees, it’s difficult to make the case that you’ve fulfilled your fiduciary duty. And if participants file a lawsuit later, as a fiduciary you could be held personally liable for any breach of fiduciary duty.
With the uncertainty of Social Security and the decline of defined benefit pension plans, employees have more responsibility and are more aware of retirement. A competitive retirement package can be used for recruiting and retention.
How often should retirement plan sponsors benchmark their plans?
Every three to five years, employers need to search the market and bring in proposals to compare to their existing plan. Year after year, fee and cost structures have declined, so it’s wise to see if there’s been compression in their market size.
On an annual basis, retirement plan sponsors also need to look at other metrics to see if progress has been made in closing some of those gaps, which can include paying too much, poor performing investments or poor participant utilization. They should compare investment options to their peers and look at participant outcomes.
Why is it so important to keep benchmarking data current and compare it?
A benchmarking report that sits on your desk isn’t helpful. You need to take that data to identify problem areas in your employees’ investment allocations or contribution gaps, then provide education to fill those gaps and measure the results annually to see if you drove positive outcomes.
If employees aren’t saving enough, change your education process to talk about why saving is important or consider adding an auto-enroll/auto-escalation feature. Or maybe employees aren’t aggressive enough with their investment options, so target your education to change that behavior.
Take an active role in getting employees to save more for retirement. Employers are so focused on managing health care renewals, but if they spent a little more by increasing the match or putting in auto-enroll/auto-escalate, it gives people the retirement balances they need to leave the workplace — ultimately controlling health care costs.
Should retirement plan sponsors do this internally or seek outside help?
When 401(k) plans were started, the idea was a company could manage its own plan. But is it a good use of the company time and resources? That’s why many employers now outsource most 401(k) work to third-party administrators or record-keepers.
It’s the same for benchmarking. There are tools and resources available, and a lot of benchmarking uses your own metrics like participation or deferral rates, but it may be more cost effective and productive to outsource. If you leave it to the professionals that specialize in this business, they understand what to watch out for and focus on. Some investment advisers even include benchmarking as part of their services.
Insights Wealth Management is brought to you by Fragasso Financial Advisors