In 2012, the Department of Labor issued final regulations for Section 408(b)2, requiring all 401(k) providers to fully disclose direct and indirect fees in a standardized format. This transparency has pressured Plan Sponsors and Advisors to scrutinize 401(k) fees, leading to significant fee compression in the retirement industry. As a result, many 401(k) providers have consolidated, and overall service offerings have been reduced. Therefore, when benchmarking a 401(k) plan today, it is crucial to review and compare not just fees, but all components of the plan.
What Is Benchmarking? Benchmarking compares your 401(k) plan’s performance and fees against similar plans. This will help you identify areas for improvement, ensure your fees are reasonable, and will keep you informed about industry trends.
Why Benchmarking Matters:
- Mitigates Legal Risks: Regular benchmarking helps avoid costly audits and lawsuits related to fee reasonableness, which can arise from non-compliance with ERISA guidelines. Benchmarking provides documentation to reduce the risk of having a prohibited transaction which can create substantial penalties for the Plan Sponsor.
- Enhances Value Proposition: Understanding and communicating the value of your services (Quality + Services + Value + Extra Credit = Fees) can help retain clients and attract new ones.
- Informs Plan Design: Insights gained can help guide enhancements in participant offerings, such as auto-escalation features and investment options.
Key Considerations When Choosing a Benchmarking Partner:
- Ensure potential partners can provide comprehensive analysis of quality, services and value.
- Look for partners who collaborate with recordkeepers for timely and relevant data.
Benefits of Benchmarking:
- Stay Competitive: Regularly comparing your services can help identify gaps and keep your practice ahead of industry trends.
- Tailor Services: Gaining a deeper understanding of client needs allows you to adapt your offerings effectively.
American Trust Retirement Plan Sponsors that utilize our 402(a) Named Plan Administrator services receive an Annual Plan Review which includes a comprehensive benchmarking review. By focusing on benchmarking, advisors can secure their competitive edge and better serve their clients in the ever-evolving 401(k) landscape!