PD08: Meaningful Comparisons: How to Benchmark Your Programs

When deciding to benchmark retirement programs, plan sponsors are faced with considerations of why, when, and how to do it.

At PLANSPONSOR ‘s 2008 Plan Designs conference, Barbara Best, VP of Investments for the Capital Strategies Group at Wachovia Securities; Tom Kmak, Principal at Fiduciary Benchmarks, Inc.; and Michael Kozemchak, Managing Director at the NRP Member Firm Institutional Investment Consulting, discussed concerns surrounding the issue of benchmarking retirement programs.

align=”center”> The Panel Audio File

Kozemchak first compared benchmarking to searching for a provider, saying it examines a plan’s provisions and investments. Benchmarking looks into a plan’s participant activity and demographic trends to compare it with other companies with similar programs. It allows sponsors to view their processes analytically and reconsider their expectations and the expectations of participants.

Best agreed, saying that benchmarking examines the plan’s actual design and fund allocation, not just costs and vendor efficiency. It is an ongoing process and can be difficult, but it provides sponsors with information necessary for the success of their plans.

Benchmarking Fees

People want fee disclosure and information on revenue sharing, Best claimed, but she was unsure whether already uninformed participants would be overwhelmed by the new information. If they already have trouble making good decisions, could increased fee disclosure discourage them from participating in a program?

Even if this is a concern, Kmak said the advantages of being able to identify different costs could outweigh the possibility of reluctant investors. He explained that even an additional 50 basis points, or 2% in costs, could greatly reduce a participant’s savings throughout their employment, leaving them significantly less prepared for retirement than they might have been if their plan sponsor recognized and corrected the unnecessary fees.

For those who are willing to endure the benchmarking process, which can be difficult and expensive, it is important to know how often they should review their plan. Kmak suggested every three to five years, probably more with a very small plan.

Generally speaking, if there were no major changes being made, it would be excessive to review plans more frequently. Kozemchak agreed, but also noted possible exceptions. “If the plan changes by more than 20%, that is the assets have increased or decreased, the number of participants has changed,” he said, “there’s probably an opportunity to go back to your vendor.”

Best suggested that plan sponsors "test the waters" with a provider, while Kozemchak said he believed in using surveys as a point of comparison. "[The survey data] is normally the high water mark for me," he said. "If we [are] involved in a project [that] cannot provide a higher level of pricing and services-more aggressive pricing than what the surveys are reporting-I don't feel like we're really doing our job."

Noting that fee compression has been a major trend over the past 24 to 36 months, he suggested learning about current market practices and comparing those with the plan. A sponsor should then to speak with their vendor-either alone or with an advocate-about their costs. Understanding the reality of the marketplace will lead to a much better deal for both sponsors and their participants.

If plan sponsors want their benchmarking to be successful, they have to be very careful when trying to find a consultant. Kozemchak recommended that they ask potential consultants how many searches they have conducted in the past 24 months and, in terms of assets and the number of participants, how many they have done for plans like theirs. They should know how many vendors the consultants included in their search process and how many earned their business. A consultant who favors friends, partners, or major companies that might have a history of success but also employ inexperienced teams that have never worked together, will not be as helpful as an objective consultant who is legitimately interested in reviewing the plan properly.

Consultants should have experience and expertise with the different elements of benchmarking, Best said. They should be able to facilitate a committee dialogue and recognize an organization's goals and views-whether it utilizes a minimal or paternalistic approach with participants and clients-so that they can support the strategies of a given business, whatever their demographic.

Finally, plan sponsors should identify what they will focus on while benchmarking, from fees and participant behavior, to plan assets, average account balances, and total number of participants, which Kozemchak advocated. Best noted that, it is equally important to make comparisons to relevant benchmarks-looking at companies that utilize different technologies or methodologies will greatly impact the final result. Kmak reiterated his point, asserting that sponsors should help ensure that the services the plan receives are cost-effective by pressing for fee disclosure.

According to Best, procedural prudence will help protect sponsors against lawsuits, and successful benchmarking will help sponsors keep track of their plan while educating and engaging their participants. By continually reviewing and adapting a plan when changes arise, sponsors can be sure their plan is successful and efficient, and help make sure participants are prepared for a happy retirement.

- Sara Kelly