Retirement Plan Benchmarking

Benchmarking retirement plans is a nuanced process that goes far beyond simply comparing costs and investment performance. To truly understand how a plan measures up, sponsors must consider plan complexity and select appropriate peer plans to make relevant comparisons. This approach ensures that benchmarking delivers meaningful insights and drives positive change.

Why Benchmarking Matters

Effective benchmarking identifies opportunities for growth by allowing sponsors to compare their plan’s features, fees, and participant engagement against peers. This comparison highlights areas where a plan may be lagging, enabling sponsors to take targeted action for improvement. Regular benchmarking also encourages fee reductions; when sponsors discover that their plan’s fees exceed market rates, they can negotiate lower fees or switch providers, directly benefiting participants’ retirement balances.

Enhancing Plan Design and Governance

Benchmarking is instrumental in improving plan design. It reveals trends and best practices, such as auto-enrollment, diverse investment options, and robust participant support. Sponsors can adopt these features to make their plans more competitive and attractive. Additionally, benchmarking enhances governance by prompting sponsors to implement stronger processes, like forming committees, conducting regular reviews, and documenting decisions based on benchmarking findings.

Boosting Employee Engagement and Aligning Goals

By measuring participant behavior and engagement, sponsors can tailor communications and educational initiatives to increase participation and improve financial outcomes. Benchmarking also helps sponsors clarify their organizational objectives, whether it’s attracting top talent, supporting employee financial wellness, or ensuring regulatory compliance. Plans can then be adjusted to better meet these goals, promoting continuous improvement and alignment with broader organizational strategies.

Fiduciary Requirements and Factors to Monitor

Plan sponsors have a fiduciary duty to benchmark their plans regularly, typically every three to five years, or sooner if significant changes occur. Beyond fees, sponsors should evaluate plan design, auto-enrollment features, target-date fund selection, and potential conflicts of interest with investment managers. Using independent providers for benchmarking is encouraged to ensure unbiased results. Annual benchmarking helps sponsors identify opportunities for growth, improvements, and better employee support.

Key Elements of Effective Benchmarking

Sponsors should consider the diversity of plan participants, communication needs, payroll systems, and overall plan goals. Success should be measured by participant behavior and engagement, not just participation rates. Fee benchmarking is critical, focusing on “all-in” fees, including investment, recordkeeping, advisory, and administrative costs.

Comparisons should be made to market averages and similar plans, using relevant data sources such as purchased databases and internal consultant databases. Soliciting bids from multiple providers can also inform fee reviews.

Trends and Best Practices

Automatic enrollment, investment committees, and participant support vary by plan size and type, with nonprofits often offering richer benefits than for-profit organizations. Employers are increasingly making eligibility and vesting rules more employee-friendly and focusing on financial well-being to attract and retain talent. Investment performance, especially of qualified default investment alternatives like target-date funds, and the reasonableness of investment fees are also important benchmarking metrics.

Checklist for Retirement Plan Benchmarking

A thorough benchmarking process should include:

• Gathering all-in fee data and comparing to market averages

• Reviewing fee types and ensuring transparency

• Analyzing investment returns and fee reasonableness

• Documenting auto-enrollment features and governance structures

• Tracking participation rates and engagement

• Assessing projected outcomes for participants

• Reviewing plan complexity, communication needs, and administrative structures

• Scheduling regular benchmarking and committee meetings

• Documenting fiduciary processes and compliance steps

• Recording employer contribution rates and vesting schedules

Use Benchmarking Data Effectively

To maximize the value of benchmarking:

• Set clear objectives for what you want to achieve

• Compare your plan to others of similar size, type, and industry

• Use independent sources for unbiased insights

• Look beyond costs to evaluate features and engagement

• Document and communicate findings with stakeholders

• Act on insights to drive improvements

• Monitor regularly to keep your plan competitive and compliant

• Tailor actions to your organization’s unique needs

Common Pitfalls and How to Avoid Them

Avoid superficial comparisons that focus only on fees or investment performance. Always account for plan complexity, participant needs, and organizational goals. Comparing your plan to others without considering differences in size, type, or demographics can lead to inappropriate benchmarks. Don’t overlook service quality or fail to act on findings. Benchmarking should be a regular, thoughtful process, not a “check-the-box” exercise. Document all processes and decisions to meet fiduciary and regulatory requirements.

Benchmarking retirement plans is a multifaceted process that helps sponsors improve plan quality, reduce fees, and enhance participant engagement. By regularly comparing plan features, costs, and outcomes to relevant peers, sponsors can identify areas for growth and ensure their plans remain competitive and compliant. Effective benchmarking involves setting clear objectives, using independent data sources, and considering both quantitative and qualitative factors such as plan complexity and service quality. Ultimately, a thoughtful and ongoing benchmarking strategy empowers sponsors to make informed decisions that benefit both their organization and plan participants.