What Is 401(k) Benchmarking?
401(k) benchmarking is a process that assesses the performance of your qualified employer-sponsored retirement plan against similar plans and standards. It focuses on various aspects, including plan fees, design, and services offered.
401(k) benchmarking involves comparing your current plan to industry standards or other comparable plans in your region, allowing you to identify any potential areas where improvement may be needed.
Benchmarking helps you ensure that your 401(k) plan complies with the Employee Retirement Income Security Act (ERISA) and other government guidelines. It also helps gauge if your plan is on track and that you get the best value for your employees.
Benefits of 401(k) Benchmarking
Benchmarking can help you better perform your fiduciary responsibility as a 401(k) plan sponsor or administrator. For example, it can pinpoint potential cost savings due to lower fees which can significantly impact the plan’s long-term performance and costs.
Benchmarking can also help you diagnose potential risks within your 401(k) plan, such as excessive fees or extremely risky investments. Thus, it can help you address any issues before they become more costly and disruptive to your employees.
Moreover, by comparing your company's plan with others in your region and industry, you ensure that your 401(k) plan is competitive and attractive to employees.
For instance, you can identify plan design opportunities, such as automatic enrollment, that can increase employee engagement in the plan. Overall, a competitive benefits package such as a 401(k) plan boosts morale and overall worker productivity.
What to Benchmark in Your Small Business 401(k) Plan
Consider benchmarking the following aspects of your small business 401(k) plan:
Plan Design
You can assess if your plan is optimized through plan asset growth, positive investment performance, and continuous employee participation. You may want to benchmark these aspects with other similar-sized plans for a more nuanced assessment of your sustainable 401(k) plan.
Make sure your plan is designed to meet the needs of your employees and business by benchmarking features such as eligibility criteria, vesting schedules, employee contributions, and employer matching.
Provider's Services
Evaluate the services provided by your 401(k) provider. Check if they are able to provide customized investment advice, educational resources and tools, and reporting capabilities that allow you to accurately monitor plan performance.
You may also evaluate the efficiency and accessibility of the service provider's technology and the quality of assistance they provide when your employees have issues or questions regarding their 401(k) accounts.
Administrative Fees
Consider fees for legal services, customer assistance, and recordkeeping. Your provider’s administrative fees should be reasonable for your 401(k) plan to stay competitive.
Benchmark the fees you pay against those of other similar-sized plans and industry standards.
Investment Fees
Investment fees are important to consider when evaluating your 401(k) plan. The total fees should be reasonable and should align with the type of investments offered. Look for hidden fees and charges, like 12b-1 fees for mutual funds.
Compare the expense ratios of similar investments in other plans to ensure your employees get the best possible return on their retirement savings.
Transaction Fees
Be aware of the fees associated with online transactions, such as trading and rebalancing. Other transactions like loans and withdrawals may also incur fees.
Compare these fees with those of other plans to ensure you get the best possible deals for your employees.
_Plan.png?width=1200&height=831&name=What_to_Benchmark_in_Your_Small_Business_401(k)_Plan.png)
Highest-Priced 401(k) Providers for Small Businesses
According to a 2021 study by Employee Fiduciary, these are the top 10 highest-priced third-party service providers for small businesses based on per-capita administrative fees.
_Providers_for_Small_Businesses_(1).png?width=1680&height=1625&name=Highest-Priced_401(k)_Providers_for_Small_Businesses_(1).png)
It does not necessarily mean you should avoid these service providers. You can consider the specific services they provide and compare them with the costs. It is best to select a provider who offers good value for money.
The Bottom Line
Benchmarking is an important part of managing a 401(k) plan. It is the practice of measuring how well your current plan is performing relative to the market and determining if there are opportunities to enhance the benefits offered.
This strategy allows your small business to better perform its fiduciary responsibility as the plan sponsor. You can compare the services offered, plan designs, administrative fees, transaction costs, and investment charges, among other things.
For example, undergoing this process ensures that you serve the best interest of your employees by comparing costs. Take note of the highest-priced service providers in the market. Make sure you choose one with service quality commensurate to the fees they charge.
Consult a qualified financial professional for guidance on benchmarking your 401(k) plan. With the right data, you can make informed decisions that will help you optimize your plan design and benefit everyone in the long run.
Benchmarking Your Small Business 401(k) Plan and Fees FAQs
What is benchmarking for small business 401(k) plans?
Benchmarking for small business 401(k) plans is the practice of comparing your current plan to others to identify areas that need improvement or services where you could receive better value for money. It enables you to measure how well your plan is performing relative to the market and determine if there are opportunities to enhance the benefits offered.
What aspects of a small business 401(k) plan should be benchmarked?
You should benchmark the services provided, plan design and fees charged for 401(k) administration, investment management, and day-to-day participant transactions.
How can small business owners benchmark their 401(k) plan?
Small business owners can benchmark their plans by comparing their current plans to those of similar-sized businesses in the same industry or to 401(k) industry standards.
Small businesses can also use the services of a qualified financial advisor or other professionals for support while undergoing this process.
What are the benefits of benchmarking a small business 401(k) plan?
Benchmarking is a great way to ensure your 401(k) plan performs to similar-sized companies and industry standards. It also helps you better fulfill your fiduciary responsibilities as the plan sponsor and ensures compliance with government regulations.
How often should you benchmark your 401(k) plan?
Benchmarking your 401(k) plan once every three years is recommended. It will help you make the necessary adjustments to your plan and ensure that it is still meeting the needs of your employees. You can also perform benchmarking whenever there are changes in regulations or industry standards.
