Research | Published in February 2017

2016 PLANSPONSOR DC Survey: Plan Benchmarking

Charting a course for your plan design and administration by reflecting on industry standards.

By Judy Faust Hartnett | February 2017

2016 PLANSPONSOR DC Survey: Plan Benchmarking

Art by Julianna Brion
Retirement plan participation and deferral rates both rose again, according to the 2016 PLANSPONSOR Defined Contribution (DC) Survey, as did the percentage of plans with immediate eligibility and immediate vesting. Some could argue that such changes are within the survey’s margin of error, but the five-year trend for these values shows a growth rate that is unquestionably positive.
It is likely that some of these plan design changes can be attributed to benchmarking: Plan sponsors see other plans’ good results and decide to adopt their practices.
For plan sponsors, benchmarking plans is more relevant than ever, between avoiding lawsuits, attaining and retaining employees and contending with budgetary and investment pressures.
Comparing plans, or benchmarking, usually falls into one of three categories.
1) Fee benchmarking. This type requires plan sponsors, as part of their due diligence, to document that their plan’s fees are reasonable for the level of the service being provided.
Cory Clark, director of Dalbar Inc. in Boston, says, “I think the 408(b)(2) [fee disclosure requirements] gave the Pension Protection Act [PPA] a shot in the arm. It put plan sponsors on notice that they had a duty to look at this stuff and understand that it’s not a set-and-forget type of deal—that they have to monitor fees on an ongoing basis.”
Plan sponsors have several ways to benchmark their plan fees. One is to create a request for proposals (RFP); additionally, they can use a third-party benchmarking service or an independent consultant. Most important: A plan sponsor must have written documentation illustrating the process that was used. If no documentation was created, the benchmarking was as good as not done at all, says Craig Freedman, managing director of the Retirement Readiness Institute in Boca Raton, Florida.
Cheryl Ouellette, specialist master at Deloitte Consulting LLP in Minneapolis, notes that the term of service agreements with providers has been getting shorter. From her perspective, this looks like plan sponsors are ensuring they get the best value by making shorter-term arrangements; these force the sponsor to keep up with the marketplace.
On that note, when plan sponsors were asked in the recent PLANSPONSOR DC Survey how often they formally evaluate their DC provider, overall 51.3% did so annually, while only 12.6% benchmarked every three up to five years.
When benchmarking fees in a routine manner, plan sponsors should keep in mind, Clark warns, that “half the [data] will be above average; plans will want to conform to the average, and [so] the average goes down. And repeat and repeat until it becomes a race to the bottom. You really have to look at the qualitative and the quantitative to make an assessment of reasonableness and not just create a death spiral of fee compression.”
2) Hunting for best practices. These practices generally focus on improving outcomes or trying to answer a specific plan issue such as “How can we improve participation and deferral rates?”
As Freedman points out, “Open architecture, competitive forces and technology have reduced or even eliminated many of the barriers smaller plans once faced.” He recommends that a sponsor talk with its service providers to learn what new services or strategies they may now offer.
Ouellette agrees it is the vendors that need to provide plan sponsors with the best practices for benchmarking their peers. “I’ve seen vendors open up their databases, allowing plan sponsors to look at how their plan is doing versus the rest of their recordkeeping universe, and/or bring this information to meetings with the plan sponsor.”
“When you are talking about larger plans, you are talking about more sophisticated folks who are in charge of finding best practices,” says Clark, “but, for the most part, I think it’s the [role of] service providers. Also with 408(b)(2), service providers’ fees will be scrutinized by the plan sponsors, so [the provider has] to add more value. That’s where it has the ability to bring these ideas to the market—there is more incentive for the provider.”
3) Competitive/peer benchmarking.
This is used, in particular, to attract and retain employees. Comparing plans within the same industry and of the same size, for instance, is typical.
For example, considering that this year’s survey shows growth in immediate eligibility, Clark says, “It’s the competitive forces of the market that drive this. Especially today, when the unemployment rate is on the lower side, the supply of labor is a little shorter and there is a more transient work force, most employees are not going to be with the[ir present] firms for 30 years. They won’t want to wait five years to be vested. Immediate eligibility and vesting is what firms have to do to remain competitive and to get the talent in that they need.”
Freedman advises plan sponsors to consider their peer group and where they fit into the industry. He notes that sometimes peer industry or size benchmarking is less valuable than you might think. “We have seen certain types of platforms dominate an industry or plan size, distorting the value of the numbers.”
Considering all angles, Clark says, Dalbar finds peer benchmarking both the most prevalent and most destructive type. For example, he says, you must ensure the sample set makes sense in terms of the comparison. “A particular fee is part of a puzzle. It reflects what the market is bearing, but it’s a brick not a wall—and it’s only the beginning.”