How Often Should You Benchmark Your 401(k) Plan? A Comprehensive Guide to Ensuring Retirement Readiness
Hey there, savvy business owner or HR professional! Are you currently offering a 401(k) plan to your employees? If so, fantastic! You're providing a vital benefit that helps your team secure their financial future. But here's a question that often gets overlooked: how often do you truly evaluate that 401(k) plan to ensure it's still serving its purpose optimally?
Many plan sponsors set up a 401(k) and then, understandably, get caught up in the day-to-day operations of their business. However, a 401(k) plan isn't a "set it and forget it" kind of benefit. Just like your business evolves, so do market conditions, regulations, and the needs of your employees. That's where benchmarking comes in – it's the critical process of regularly reviewing your 401(k) plan against industry standards and comparable plans to ensure it remains competitive, cost-effective, and compliant.
So, how often should you benchmark your 401(k) plan? While the Department of Labor (DOL) suggests a minimum of once every three years, industry best practices and legal prudence lean towards a more frequent review, ideally every one to two years. For larger or rapidly growing plans, even more frequent benchmarking might be advisable, especially if fees are asset-based and could be increasing significantly with plan growth.
Let's dive into a step-by-step guide to understanding and executing this crucial process.
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| How Often Should You Benchmark Your 401k Plan |
Step 1: Understand Why Benchmarking is Non-Negotiable
Before we get into the "how," let's truly grasp the "why." This isn't just about ticking a box; it's about protecting your business, empowering your employees, and fulfilling your fiduciary duties.
1.1 Protecting Your Fiduciary Responsibility
As a 401(k) plan sponsor, you are a fiduciary under the Employee Retirement Income Security Act of 1974 (ERISA). This means you have a legal and ethical obligation to act solely in the best interests of your plan participants. Failing to regularly evaluate your plan, particularly concerning fees and investment options, can expose your company and you personally to significant legal and financial risks, including potential lawsuits and penalties. Benchmarking helps you demonstrate prudence and diligence.
1.2 Ensuring Competitive Fees and Services
Fees can quietly erode your employees' retirement savings over time. Benchmarking allows you to compare your plan's administrative, investment, and advisory fees against similar plans in the market. Are you getting the best value for the services provided? Are your fees reasonable? Identifying excessive fees can lead to substantial savings for your employees, boosting their retirement readiness.
1.3 Optimizing Investment Options
QuickTip: Stop scrolling fast, start reading slow.
The investment landscape is constantly changing. New funds emerge, existing ones might underperform, and market conditions shift. Regular benchmarking helps you assess the performance, risk, and costs of your plan's investment options. This ensures your employees have access to a diversified and appropriate range of investment choices aligned with their needs and risk tolerances.
1.4 Improving Employee Engagement and Outcomes
A well-designed and competitive 401(k) plan can be a powerful tool for attracting and retaining talent. If your plan is lagging behind others in terms of fees, investment performance, or features, it might be perceived as a less valuable benefit. Benchmarking helps you identify areas for improvement, which can lead to higher participation rates, increased deferral percentages, and ultimately, better retirement outcomes for your employees.
1.5 Staying Compliant with Evolving Regulations
Retirement plan regulations, like those introduced by the SECURE Act and SECURE Act 2.0, are continuously updated. Benchmarking helps you ensure your plan design and operations remain compliant, reducing the risk of non-compliance and potential Department of Labor audits.
Step 2: Gathering the Essential Data for Your Benchmark
Think of this as your "data collection phase." You can't compare apples to apples if you don't know what kind of apple you're starting with!
2.1 Collecting Core Plan Documents
Start by assembling all relevant plan documents. This typically includes:
Your Plan Adoption Agreement: This document outlines the fundamental design of your 401(k) plan.
Recent Asset Statements: These will give you a clear picture of your plan's total assets under management.
Fee Disclosures (408(b)(2) and 404(a)(5)): These are crucial as they detail all the fees charged to the plan and its participants. Pay close attention to these!
Prior Year's Compliance Testing Report: This report provides insights into your plan's non-discrimination testing results.
Service Agreements with Providers: Understand the scope of services provided by your recordkeeper, custodian, and advisor.
2.2 Understanding Your Current Plan's Structure
Go beyond the documents and truly understand the operational aspects of your plan:
Tip: Read mindfully — avoid distractions.
What are your current employer match and vesting schedules?
What are the eligibility requirements for participation?
Are there loan or withdrawal options, and what are their terms?
Do you have automatic enrollment and/or automatic escalation features?
What is your current plan participation rate and average deferral rate?
2.3 Breaking Down All Costs
This is a critical area. 401(k) fees can be complex and sometimes opaque. You need to identify all cost components:
Recordkeeping fees: For tracking contributions, maintaining participant balances, processing transactions, and issuing statements. These can be flat fees or asset-based.
Investment expense ratios (ERs): These are embedded within the mutual funds or other investment vehicles offered in your plan and are typically expressed as a percentage of assets.
Brokerage commissions and 12b-1 fees: Hidden fees that often pay for sales and marketing or compensation to various service providers.
Advisory and consulting fees: What you pay your plan advisor for their guidance and services.
Administrative costs: Beyond recordkeeping, this can include legal, audit, and trustee fees.
Pro Tip: Be wary of bundled fees where it's hard to discern individual service costs. Ask for a detailed breakdown from your current provider.
Step 3: Selecting the Right Benchmarks for Comparison
You can't just compare your plan to a generic "average" 401(k). You need to find relevant benchmarks that make sense for your specific situation.
3.1 Industry Averages and Peer Group Comparisons
Industry Averages: Look for data on typical fees and plan features for plans of similar size (by assets and number of participants) and within your industry. This provides a broad baseline.
Peer Group Comparisons: This is more targeted. Identify companies similar to yours in terms of:
Company size and revenue
Number of employees (especially 401(k) eligible employees)
Industry sector
Geographic location (sometimes relevant for regional differences in services/costs)
3.2 Key Metrics to Benchmark Against
Beyond just fees, consider these vital performance indicators:
Investment Performance: Compare the returns of your plan's investment options against relevant market indices (e.g., S&P 500 for a large-cap U.S. equity fund) and peer-group funds with similar investment objectives and risk profiles. Look at performance over multiple time horizons (1, 3, 5, 10 years).
Participation Rates: How many eligible employees are actually contributing? Aim for higher than 67%.
Average Deferral Rates: What percentage of their salary are employees contributing on average?
Employer Match Utilization: Are employees contributing enough to maximize the company match?
Service Provider Quality: Evaluate the responsiveness, technology, participant support, and overall efficiency of your current recordkeeper, advisor, and other service providers. Are they meeting your and your employees' needs?
Step 4: Analyzing and Evaluating Your Findings
Now comes the detective work! With your data and benchmarks in hand, it's time to analyze.
Tip: Check back if you skimmed too fast.
4.1 Assessing Fees for Reasonableness
Compare each fee component (recordkeeping, investment expense ratios, advisory fees) to your chosen benchmarks.
Ask yourself: Are we paying significantly more for any service compared to similar plans? Are there hidden fees? Are the fees justified by the services provided?
Remember that "reasonable" doesn't always mean "cheapest." You want value for money. A slightly higher fee might be acceptable if it comes with superior service, better technology, or more comprehensive participant education.
4.2 Evaluating Investment Performance and Selection
Review the performance of each fund option within your plan. Are any consistently underperforming their benchmarks?
Are the fund expense ratios competitive? Passively managed index funds generally have lower fees than actively managed funds.
Is your investment lineup diversified and appropriate for your participant demographic? Are there clear investment objectives for each fund?
Do you have an Investment Policy Statement (IPS)? This document outlines the criteria for selecting, monitoring, and replacing investment options, serving as a crucial guide for your fiduciary obligations. If you don't have one, it's highly recommended to create one.
4.3 Scrutinizing Plan Design and Features
Compare your plan's design features (e.g., eligibility, matching formula, vesting schedule, loan options) to industry best practices and peer plans.
Could adjusting your match or adding automatic enrollment/escalation boost participation?
Are your vesting schedules competitive enough to aid in employee retention?
4.4 Reviewing Service Provider Effectiveness
Are participants receiving timely and accurate statements?
Is the online portal user-friendly and intuitive?
Are customer service representatives knowledgeable and accessible?
How effective are the financial education and communication efforts provided by your service provider?
Step 5: Implementing Improvements and Ongoing Monitoring
Benchmarking isn't a one-time event; it's a continuous cycle of improvement.
5.1 Developing an Action Plan
Based on your analysis, identify specific areas for improvement. This might include:
Negotiating with Current Providers: If you find your fees are too high or services are lacking, approach your current providers with your benchmarking data. They might be willing to adjust their terms to retain your business.
Issuing a Request for Proposal (RFP): If negotiations aren't fruitful, or you believe a significant change is needed, issue an RFP to other 401(k) providers. This allows you to solicit competitive bids for services.
Adjusting Plan Design: Implement changes to your matching contributions, vesting, or automatic features to enhance participant engagement and plan effectiveness.
Updating Investment Lineup: Remove underperforming funds, add new, more competitive options, or introduce lower-cost alternatives.
5.2 Documenting Your Process
Maintain thorough records of your benchmarking process, including the data collected, analysis performed, decisions made, and any actions taken. This documentation is vital for demonstrating your fiduciary diligence, especially in the event of a DOL audit.
Tip: Don’t skip the details — they matter.
5.3 Continuous Monitoring
Even after implementing changes, the work isn't over. Regularly monitor your plan's performance, fees, and service quality. This doesn't necessarily mean a full re-benchmark every month, but keep an eye on key metrics and new market developments.
Schedule a recurring reminder (annually or bi-annually, depending on your plan's size and complexity) for your next comprehensive benchmarking review.
By following these steps and committing to regular benchmarking, you're not just fulfilling a compliance requirement; you're actively working to provide a robust, cost-effective, and valuable 401(k) plan that genuinely supports your employees' journey toward a secure retirement.
10 Related FAQ Questions
Here are some quick answers to common "How to" questions related to 401(k) plans and benchmarking:
How to get started with 401(k) benchmarking if I'm a small business?
Start by gathering your existing plan documents and reaching out to a qualified retirement plan advisor who specializes in small business 401(k)s. They can guide you through the process and help you compare your plan to similar-sized businesses.
How to find comparable 401(k) plans for benchmarking?
A retirement plan advisor is your best resource. They have access to proprietary databases and industry benchmarks. You can also research public data from the Department of Labor or industry surveys, but an advisor will provide more tailored comparisons.
How to identify hidden fees in my 401(k) plan?
Look closely at your 408(b)(2) and 404(a)(5) disclosures. Pay attention to terms like "revenue sharing," "12b-1 fees," and "wrap fees" within investment expense ratios, as these can obscure actual costs. Ask your provider for a detailed, itemized breakdown of all fees.
How to reduce 401(k) plan costs?
Consider negotiating with your current provider, issuing an RFP to other providers, opting for lower-cost index funds over actively managed funds, and ensuring your administrative fees are reasonable, possibly even exploring flat-fee structures.
How to improve employee participation in my 401(k) plan?
Implement automatic enrollment with opt-out, offer a competitive employer matching contribution, provide clear and consistent financial education, simplify investment options (like target-date funds), and offer Roth 401(k) options if available.
How to select a new 401(k) plan provider?
Focus on providers that offer transparency in fees, strong customer support for both you and your employees, user-friendly technology, robust investment options, and comprehensive fiduciary support (e.g., 3(16) fiduciary services).
How to evaluate the performance of my 401(k) investments?
Compare the gross and net (after fees) returns of your plan's funds against relevant market indices and peer-group funds over various timeframes (e.g., 1, 3, 5, 10 years). Pay attention to risk-adjusted returns.
How to ensure my 401(k) plan remains compliant with DOL regulations?
Regularly review your plan with your retirement plan advisor to ensure it meets current regulatory requirements. Maintain an Investment Policy Statement (IPS) and adhere to its guidelines for investment monitoring. Stay informed about legislative updates like SECURE Act 2.0.
How to know if my 401(k) plan design is optimal?
Benchmark your plan design features (match, vesting, eligibility, auto-enrollment) against industry averages and peer groups. An optimal design aligns with your company's goals (e.g., high participation, talent retention) and budget.
How to communicate 401(k) plan changes to employees effectively?
Use clear, jargon-free language. Offer multiple communication channels (email, online portal, in-person meetings, webinars). Highlight the benefits of any changes to employees, such as lower fees or improved investment options.
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