By Mark Olsen, Managing Director at PlanPILOT
What Is Retirement Plan Benchmarking?
Benchmarking is a process where an employer evaluates and measures its plan against others (normally like-kind) to determine strengths and potential shortfalls. Results may indicate where improvements can be made, using defined criteria that may be applied to the comparables in a fair and balanced manner. For retirement plans, these criteria could include plan design and provisions, features and services of the plan provider, investment selection and offerings, and fees and expenses.
Benchmarks are derived from the average of a large sampling of peers. An oft-used term for each criterion is “reasonableness,” or whether the benchmark fits within the range of other comparable plans. For example, “fee reasonableness” is a common watchword among plan sponsors and their advisors to avoid running afoul of ERISA-based sanctions and enforcement from the DOL. Using benchmarks to design and later demonstrate that the plan is adhering to common industry standards is a wise strategy to stay out of trouble and keep your plan functioning properly.
Your Plan May Work, But Is it Really Right for You and Your Employees?
Assuming you’re being a responsible plan sponsor and following the benchmarked criteria, the next question to ask is: Is your plan successful and effective for your employees? As a fiduciary, plan sponsors are required to ensure the plan is working and meets the needs of its participants. Does your plan? It may meet certain benchmarks, but what is the basis for these benchmarks? In other words, the benchmarks may be measurable, but are they meaningful for you and the participants in the plan?
For example, your plan’s “participation rate” (or how many employees participate in the plan) may be 85% against a benchmark of 80%. While your rate exceeds the benchmark, how does it compare with similar organizations in your industry? If others achieve 90% or better, then your plan falls below average and now becomes a shortfall, not a strength.
Further, is there a reason behind where your standards measure compared to the benchmark? Are your employees actively seeking self-help financial tools from a provider? Do they have the capacity to participate in the plan, and do they have an active understanding of plan benefits to make sound financial decisions, whether these involve investment selection, deferral rate, or withdrawal requests?
The Benefits of Customization
These questions point to the need for careful plan design and customization. Retirement plan participants often ask their advisors, “How much do I need to save for retirement?” The honest and fiduciary-minded advisor would (or should) state, “It depends.”
Just as no one car, house, or personal financial plan fits everyone’s needs, a retirement plan should be custom-designed and managed with the individual needs of the plan participants and the plan sponsor company in mind, within the context of the specific industry, the participant demographics, and even the regional aspects of the company and participants. Moreover, knowing the right questions to ask about the benchmark criteria is crucial to maintaining a vibrant and successful retirement plan.
Why a Partner Consultant Could Be Invaluable
Having a team of professionals to assist in the design and management of your plan offers numerous benefits, including the confidence that your plan is functioning smoothly and cost-effectively and meeting the needs of your company and its employees.
In 2023, just over 100 new ERISA class-action lawsuits were filed. The regulations of ERISA have increased in complexity over the years and the DOL has become more aggressive in their oversight and enforcement. Understanding and managing these complexities takes away valuable time and focus from running your business. This is where a retirement plan advisor can reduce your responsibilities and risk exposure.
At PlanPILOT, our company is uniquely positioned to help you with these objectives. If you’re ready to upgrade to a new standard for your benefit planning, reach out to us at (312) 973-4913 or send an email to mark.olsen@PlanPILOT.com to learn more about how we can customize our services and your plan to fit your unique needs.
About Mark
Mark Olsen is the managing director at PlanPILOT, an independent retirement plan consulting firm headquartered in Chicago. PlanPILOT delivers comprehensive retirement plan advisory services to 401(k), 403(b), and 457 plan sponsors. His specialties include plan governance, investment searches, investment monitoring, and plan oversight. Mark is recognized as a leader in the industry and speaks at national conferences, including those organized by Pensions & Investments, and CUPA-HR.