401(k) Plan Benchmarking: Why and How

As a business owner who may currently be a trustee of a 401(k)/retirement plan or you may be looking into it, the aim of this article is to explain what, how and why plan benchmarking is important for you and your employees. A retirement plan can be a great tool to attract and keep top talent, but it’s important to make sure that your plan is optimized. Benchmarking your plan can help you make sure your plan is optimized, and if not help you find the best way to optimize it.

In today’s competitive landscape, ensuring your retirement plan’s effectiveness and efficiency is paramount for any organization. Plan benchmarking serves as a crucial audit to gauge your plan’s performance against industry standards and best practices. Below we have tried to lay out for beginners or even some experienced plan trustees the process of benchmarking their retirement plan, focusing on a schedule of doing one every three years, which we believe strikes a balance between stability and adaptability.

Executive Summary:

  • Understand Benchmarking: Plan benchmarking involves comparing your retirement plan against industry standards to evaluate competitiveness, cost-effectiveness, and performance.
  • Key Areas for Benchmarking: Focus on investment options, fees and expenses, plan features and design, service provider performance, and participant outcomes.
  • Triennial Benchmarking Schedule: Conducting benchmarking every three years allows for meaningful data accumulation and trend analysis while minimizing disruption.
  • Actionable Insights: Use the benchmarking process to identify areas for improvement, negotiate better terms with service providers, and enhance plan features for participants.

The Importance of Regular Benchmarking

Benchmarking your retirement plan every three years is a strategic approach that balances the need for consistent monitoring with the practicalities of plan management. This timeframe allows for significant market developments and legislative changes to impact your plan, providing a richer context for evaluation. Regular benchmarking ensures that your plan remains compliant, competitive, and aligned with your organizational goals and employee needs.

Step-by-Step Guide to Triennial Plan Benchmarking

1. Preparing for Benchmarking

  • Gather Data: Compile comprehensive data on your plan, including investment performance, fee structures, plan features, and participant engagement metrics.
  • Set Objectives: Clearly define what you aim to achieve through benchmarking, whether it’s reducing costs, improving participant satisfaction, or enhancing investment performance.

2. Identifying Benchmarking Metrics and Standards

  • Select Relevant Metrics: Choose metrics that align with your objectives, such as average expense ratios, participation rates, and investment returns.
  • Choose Comparison Groups: Identify appropriate benchmarks and peer groups for comparison, considering factors like industry, plan size, and participant demographics.

3. Conducting the Benchmarking Analysis

  • Analyze Data: Compare your plan’s performance against selected benchmarks to identify strengths and weaknesses.
  • Engage Stakeholders: Involve key stakeholders in the analysis process to ensure a comprehensive understanding of the plan’s performance and potential areas for improvement.

4. Developing an Action Plan

  • Prioritize Findings: Based on the analysis, prioritize areas that require immediate attention or offer the most significant improvement potential.
  • Create a Roadmap: Develop a detailed action plan outlining steps to address identified issues, including timelines and responsible parties.

5. Implementing Changes and Monitoring Progress

  • Execute the Action Plan: Implement the strategies outlined in your action plan, ensuring to communicate changes and rationale to all stakeholders.
  • Monitor and Adjust: Regularly review the impact of implemented changes and adjust your strategies as necessary to achieve desired outcomes.

6. Reporting and Communication

  • Document Findings and Actions: Create comprehensive reports detailing the benchmarking process, findings, and actions taken.
  • Communicate with Participants: Transparently communicate the benchmarking outcomes and subsequent changes to plan participants to build trust and engagement.

Plan benchmarking is a vital process for maintaining a competitive and effective retirement plan. By following a structured approach to benchmark every three years, organizations can ensure that their plans meet regulatory standards, align with industry best practices, and most importantly, serve the best interests of their participants. Regular benchmarking fosters continuous improvement, helping organizations adapt to changing market conditions and legislative landscapes, thereby securing the financial futures of their employees.

If you have gotten this far and feel a little overwhelmed, thinking “when am I going to find time to do this?”, don’t worry, you’re not alone. Many business owners feel this way, and for that reason don’t do a plan benchmark like they should. Enter Mills Wealth. As a 3(38) plan fiduciary we can help walk you through the process and help you make sure that your 401(k) or retirement plan is fully optimized. Give us a call if you are interested and we will make sure that you feel proud of what you offer employees.