“Fiduciary responsibility” is a term that can make your heart skip a beat as a benefit plan sponsor, and understandably so. The Department of Labor is charged with enforcing the Employee Retirement Income Security Act of 1974 (ERISA) and does so by requiring plan sponsors to perform certain duties of care when handling their participants’ retirement funds. To help alleviate some of this worry, we recently introduced a helpful ERISA compliance checklist for plan fiduciaries in this article. But today, we’d like to talk about something else. We’d like to talk about one simple thing that plan sponsors can do to evaluate just how well they are fulfilling their fiduciary duties: benchmarking.
Benchmarking a Benefit Plan
Benchmarking your employee benefit plan is something you and your team should be doing on a regular basis – quarterly, bi-annually, or, at the very least, annually. Often, the actual benchmarking report is generated by your investment advisor or a third party who has access to your plan. This organization will use your plan’s data to compare your performance with plans of a similar size, in a similar industry, and in a similar geographic location.
Gathering the data is the easy part. The difficult part begins when you choose which performance measures to take into consideration. The assessing company will review the plan performance, of course, but they will also look at the fee structure, the total combined fees, and even the plan complexity. Another aspect they may consider is your strategy for offering the plan in the first place. Companies may offer a benefit plan to retain the best employees, to improve morale, or even to increase employee job performance. A good benchmarking report will include all of this information, so it will be up to you to pick out the most relevant performance measures and make adjustments to your plan accordingly.
Why Benchmarking is Necessary
Benchmarking is an unbiased way to look at your plan’s performance, so it’s a great tool to help you think more critically about your choices. Upon seeing the report, you may ask yourself, “Why are our fees on the high end of the spectrum?” or, “We don’t offer as many options as the average plan. Do we have a good reason for having such limited selections?”
Benchmarking may also be a great way for you to be more competitive in the workplace. Websites like Glassdoor and Indeed will compare the benefit plans of companies in the same industry, so make sure that your 401(k) options are competitive. For example, if you see your matching scheme falling short of your competitors, you can make changes that’ll guarantee you’ll get the first pick of candidates on the market.
While your main goal for offering a benefit plan might be to improve your benefit package, you still need to make sure it’s a good financial move, and benchmarking can help you measure this. Benchmarking can give you the information necessary to calculate your return on investment. You should be able to ask yourself, “Are our plan options reducing turnover enough to make the cost of running the plan worthwhile?”
Need More Reasons to Begin Benchmarking?
Benchmarking is an ERISA requirement; the Department of Labor will expect you to prove the ways in which you examined your performance throughout the year. It also shows proper due diligence – an expectation for a fiduciary in your position. Most likely, your investment advisor will run these reports for you at no extra charge, so all you’ll need to do is take the time to review them and make improvements accordingly.
If you have questions about benchmarking or other concerns about remaining ERISA compliant, contact your WNDE accountants.