What you need to know about 401(k) benchmarking

If you currently offer a 401(k) plan, it’s important to check that you’re offering your employees the best option. This is where 401(k) benchmarking comes in. Comparing plan details and fees against industry averages can help you better understand if your plan is designed to empower your employees—or if you need to update it.

If you’re already benchmarking your plan, you’re in good company. According to Callan’s Defined Contribution Survey, more than half of plan sponsors were likely to conduct a fee study in 2020. Of that group, nearly 90% of respondents said they benchmarked plan fees in their fee review process. But even if you include benchmarking in your current process, what you pay for—and what you receive—can vary widely from provider to provider. That’s why it’s important to ensure your process is airtight and your comparison data is accurate.

Below, we review what you need to know about benchmarking and why it’s important for you and your company. 

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What is 401(k) benchmarking?

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. To ensure compliance with ERISA guidelines, it’s smart for plan sponsors to benchmark fees annually against industry standards, including advisory, recordkeeping, and investment fees.

What to benchmark: 

• Plan fees

• Participant fees 

• Services you receive for these fees

If participants are responsible for paying plan design and administration fees, plan sponsors must ensure these fees are reasonable. And if you’re a plan sponsor, you have a fiduciary responsibility to ensure the fees plan participants are paying are reasonable. 

Why is benchmarking important?

According to the Employee Retirement Income Security Act (ERISA), the primary responsibility of plan fiduciaries is to act in the best interest of their plan participants. “Fiduciaries must act prudently and must diversify the plan's investments in order to minimize the risk of large losses,” according to ERISA.

To follow legal guidelines, it’s important to frequently compare your plan’s details with other providers. This means following plan documents so that plan terms are consistent with ERISA. Because plan sponsors must document that they’re acting in the best interest of the plan, benchmarking can help ensure you’re doing your due diligence. It also limits fiduciary liability by:

1. Confirming you are getting the best services and fees possible

2. Certifying your plan is competitive (which can be helpful in attracting and retaining talent)

3. Ensuring your plan still achieves the objectives of your participant’s financial goals 

What should you compare when benchmarking a 401(k) plan? 

Learning what you’re paying in 401(k) fees can help you compare against other providers. Unfortunately, 401(k) costs are not as easy to understand as you’d think. The 401(k) industry has built up a reputation for charging sneaky, shady fees that can take advantage of businesses and their participants. As a result, many companies may be unaware of what they’re paying. According to the Department of Labor, 401(k) plan fees can be divided into three categories:

1. Administrative fees: Include customer support, recordkeeping, and legal services. Depending on your plan, employers may cover 401(k) administration costs, or you may pass them on to employees as flat fees or as a percentage of the assets in the plan (which makes plan sponsors liable for these fees).

2. Investment fees: Charged to plan participants as a percentage of fund assets. Plans can invest differently, including managed investment funds (although mutual funds may be more cost-efficient than target-date funds). Because expense ratios cover the operating costs of funds relative to a participant’s assets, it’s wise to consider low-cost funds and watch out for hidden fees (e.g. large sales loads and 12b-1 fees).

3. Transaction fees: Some providers charge plan participants fees for utilizing specific plan features such as loans, hardship withdrawals, financial advisory services, and more. Individual service fees can reach up to $500 per transaction, depending on the reason—although some providers don’t charge any transaction fees.

For context, the average investment expense for 25 participants and $250,000 in assets is 1.64%, according to the 401(k) Averages Book*. What this means is that fees shouldn’t be overlooked! They may be buried in your statement and seem like a small percentage—but over time, can add up and make a big dent in account returns.

To help ensure fees and investments are appropriate, consider extending your benchmarking efforts beyond just plan fees. Evaluating performance of investments can be another part of benchmarking due to fiduciary duty. Plan asset growth and average account balance can be two indicators of plan design. The goal of any retirement plan is to provide adequate retirement income—and if a plan is not growing, it may be time to look under the hood. 

How often should you benchmark your 401(k) plan?

In theory, you can—and should—benchmark each year. In doing so, you can help ensure you’re doing your due diligence as a plan sponsor. Understanding and evaluating plan fees, investment expenses, investment options, and services is an essential fiduciary responsibility—and according to the Department of Labor, it’s an “ongoing responsibility.” Participants must receive information about fees and expenses before they first direct their investments in the plan.

Are you getting the most out of your current retirement plan? 

How does your 401(k) stack up? Are there changes to make to your plan design? Is it time to switch providers? Benchmarking can help you check if your provider is competitive or if you should start looking for a new plan. 

Human Interest can assist with compliance, recordkeeping, administration, reporting, and more. Our clear, affordable pricing provides small businesses the benefits of a large-scale retirement plan—with way less hassle. We make offering retirement plans easy and accessible, so you get the most from your 401(k) plan. Get in touch with Human Interest to learn more.

*The average investment expense "[i]s inclusive of investment management fees, fund expense ratios, 12b-1 fees, sub-transfer agent fees, contract charges, wrap and advisor fees or any other asset based charges," according to 401(k) Averages Book, 21st edition, www.401ksource.com, 2021.

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