In an economic period that often feels like a rollercoaster, safeguarding retirement savings has become more challenging than ever. Every dip and surge in the market can directly impact the financial security of your employees’ futures. This is precisely why frequently benchmarking your 401(k) plan isn’t just smart, it’s an absolute necessity.
An Ongoing Responsibility: Services and Fees?
Finance experts at 1834, a division of Old National Bank, point out that although the Department of Labor recommends benchmarking the retirement plan every three years, there are good reasons to test how well the plan is performing more frequently:
In today’s unpredictable financial landscape, where market uncertainty can swiftly erode retirement savings, benchmarking a 401(k) plan is a critical step for plan sponsors and participants alike. Industry best practices advise reviewing it every year because of lawsuits and regulations, and market moves. Reasons for benchmarking your retirement plan include:
- Protecting employees’ assets.
- Fiduciary responsibility.
- Ensure only reasonable fees are paid.
Employers that fail to do this can be held liable for plan mismanagement. In a defined contribution plan (401(k) or 403(b) plan), an employee’s account balance determines the amount of retirement income they will generate in retirement. Fees and expenses can dramatically reduce that amount. Effective fee management is a critical component in maximizing retirement readiness. As little as 20 basis points (0.20%) in excess fees could reduce the payout of retirement benefits by as much as $300,000 over an employee’s lifetime.
Regular benchmarking arms retirement plan sponsors with answers to critical questions about how the plan is currently benefitting participants, bearing in mind: “The retirement plan your company initially started with may not always be a good fit in the long run. Benchmarking is the process of evaluating if a retirement plan’s services and fees are competitive with other plans of a similar size or type.” When benchmarking, plan sponsors are essentially looking for answers to questions like: How do the fees stack up when compared to others? Are participants receiving solid, and competitive services? Are the investment choices appropriate? Are plan communications timely, engaging and intelligible? Pension professionals observe that retirement plan sponsors “having difficulty answering any of these questions” may find it’s time to secure an independent, expert retirement plan review, which can shine the spotlight on issues in need of improvement.
Transparency around fees, as well as “more nuanced fee evaluation,” have become particularly hot buttons for plan sponsor attention, especially given the swirl of related ERISA litigation over the past years. Categories of 401(k) fees plan sponsors need to fully understand and assess on a regular basis include:
- Plan recordkeeping/administration fees
- Investment expenses
- Investment advisory fees
- Individual service fees
Good To Know: The DOL on Benchmarking
The Department of Labor considers benchmarking an ongoing responsibility, and reminds retirement plan sponsors:
Among other duties, fiduciaries have a responsibility to ensure that the services provided to their plan are necessary and that the cost of those services is reasonable…..As a plan fiduciary, you have an obligation under ERISA to prudently select and monitor plan investments, investment options made available to the plan’s participants and beneficiaries, and the persons providing services to your plan. Understanding and evaluating plan fees and expenses associated with plan investments, investment options, and services are an important part of a fiduciary’s responsibility. This responsibility is ongoing. After careful evaluation during the initial selection, you will want to monitor plan fees and expenses to determine whether they continue to be reasonable in light of the services provided.
Even with due diligence on benchmarking to protect plan participants, it’s essential for plan sponsors to also keep current with protections for themselves. Although it’s common to outsource administrative and investment services, as fiduciaries, sponsors remain responsible (and personally liable) for ensuring that participants reap as much benefit as possible on the quest toward secure retirement. Remember, fiduciary liabilities can be reduced, but never eliminated. Unforeseen challenges arise all the time for plan sponsors, and seemingly small oversights trigger costly ERISA regulatory action and lawsuits. In fact, the average ERISA claim costs ordinary businesses over $1.2 million in legal fees. Colonial Surety Company makes it affordable for retirement plan sponsors across the country to protect themselves. For a few dollars a day, our Fiduciary+ Cyber Liability Insurance bundle arms you with:
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