DC Plan Benchmarking Survey

State of the Industry

State of the Industry

Lay of the Land

By studying trends in DC plan design and usage, sponsors can benchmark and improve their own plans

It is well worth plan sponsors taking time to benchmark their plan’s design features—in fact, doing so can help them achieve plan goals.

“It goes back to, what is the purpose of your plan? Why do you have a plan to begin with?” says Managing Director Jim Lyday of Pensionmark in Nashville, Tennessee. “Most sponsors will say, ‘The main reason we have the plan is so our people can retire, and we want to help them get there.’”

Knowing that, sponsors can look at benchmarking data on plan design features to get a sense of industry best practices and understand what comparable employers do. “We always ask, ‘Does this feature add to [retirement readiness], or not? Is this feature getting more people to be able to replace enough of their income in retirement?’” he says.

Reasons to Benchmark Plan Design

Decisions about plan design are not fiduciary responsibilities under the Employee Retirement Income Security Act (ERISA), explains David Levine, a principal and co-chair of the plan sponsor practice at Groom Law Group, Chartered, in Washington, D.C. “So plan design does not [legally] require benchmarking,” he says. “You don’t have to have a retirement plan, and you don’t have to have certain design features in your plan.” Sponsors do not generally get sued over plan-design features such as the employer match formula, he says. Decisions about plan design fall into the legal category of “settlor” activities.

“There are two different buckets involved in setting up a retirement plan,” Levine says. “Bucket No. 1 is settlor functions such as, ‘Do we want a plan? Who do we want to be eligible to participate? And how much do we want to contribute?’ ERISA’s fiduciary duties don’t apply to these decisions: They are a business call. The other bucket is about operating the plan: ‘Who do we want to choose as the vendor for our plan? What investments do we want to offer?’ These are fiduciary decisions, because you’re running the plan solely in the best interests of participants.”

While benchmarking plan design features is not mandated, Levine says, it helps employers make important decisions. “For competitive reasons and for long-term business planning, it makes a ton of sense,” he says. “It’s helpful to find out, what are your competitors offering in their plans? It also helps you to think about, what features can you offer to help keep your people engaged and help them transition to retirement on time?”

Multiple-Source Benchmarking Makes Sense

A best practice when benchmarking plan design features is to schedule to do it regularly, Lyday suggests. “Generally, I’d say it’s a good idea to do it annually. Not a lot is going to change on a quarter-to-quarter or semi-annual basis.”

Lyday also advises seeking benchmarking data from multiple sources. “Single-source benchmarking data can be incredibly misleading, positively or negatively,” he says. A single set of data may be insufficient because the source may have surveyed mostly companies in different industries, or in a different geographic region, or with a significantly different plan size. “You can find data to support any idea,” he says. “It’s important to put the data into the context of your strategy, not use the data for data’s sake.”

Having data both for retirement plans overall and for peers comparable to the employer also helps a sponsor that wants to make the case for improving a plan’s design, Lyday says. “When you’re advocating [to an organization’s leadership] for these sorts of things to change, you’re asking people—at least in their minds—to take a risk,” he says. “So it’s important to benchmark from more than one information source, to reduce the sense of risk.”

How can a sponsor work with multiple sets of benchmarking data? “We tend to look at the retirement plan industry as a whole, to begin with,” says Dan Peluse, executive director – retirement benefits advisors division at Wintrust Investments in Chicago. “I think it’s important from a [best-practice] knowledge perspective. You want to know how your plan stacks up, compared with employers overall.

“Then we drill down to the individual business sector that a client competes in,” Peluse continues. “When you’re competing with other employers for a talent pool, you want to make sure you have best-in-class benefits. And when you know where you are compared with other employers, then you can think about what you want to do to stand out with your plan.”

Analyzing the Data

When analyzing benchmarking data, Peluse suggests that sponsors start by reaffirming their goals for having a retirement plan. “Then we back into, what are the factors, for their employee demographics, that will make the biggest difference in achieving those?” he says. “There’s a lot of benchmarking data out there, so we shrink it down to the components most likely to move the needle for that employee group.”

This often means focusing on benchmarking data for four or five key plan design features that would have the biggest impact on that plan’s goals if the features changed, he says. The match usually tops that list, he adds, often followed by the automatic enrollment default deferral rate and automatic escalation features. Other frequently used key factors include vesting and eligibility rules.

In thinking about design changes after reviewing benchmarking data, Peluse says, budget realities often come into play. “So we always put the cost discussion first and foremost,” he notes. “We’ll ask the employer, ‘Where are you at today, in terms of what you’re willing to spend on your retirement program?’ If the employer is going to consider giving every participant a 6% match, for example, we need to be cognizant of what the cost will be if the plan gets a 95% participation rate.”

To help sponsors understand the implications, Wintrust will utilize software to run an analysis of the impact of design changes being considered. For instance, an analysis of changing the default deferral rate will project the impact of different options for the deferral percentage on that plan’s participation rate, as well as projecting the impact of each option on the employer’s match costs.

“Often an employer will say, ‘Hey, we can’t do all of this today, but let’s do one or two things now, and we’ll use benchmarking data to move us incrementally toward the ultimate solution,’” Peluse says. “We always tell employers, ‘Let’s do this intelligently, so we get the best results we can for the money you have to spend.’”

—Judy Ward

FAQ on Benchmarking

Industry experts David Levine of Groom Law Group, Jim Lyday of Pensionmark, Dan Peluse of Wintrust, and Brian O’Keefe of PLANSPONSOR answer common questions that may arise when benchmarking plan design.

Q: How often should one benchmark one’s plan design? 

Sources agree it is a good idea to benchmark plan design features, though there is no legal requirement to do that. Benchmarking annually or as plan demographics change makes sense for competitive reasons, for long-term business planning, and for an opportunity to discover and consider features that could further engage participants.

Q: How many sources of benchmarking data are needed to effectively benchmark plan design?

Single-source data may not be comparable data for a particular plan sponsor, as it may rely on overweighted sources, or plan sizes or industries too unlike the sponsor’s. It is important to use several sources and to put the data into the context of the sponsor’s strategy. Looking for an exact industry match is less important than trying to figure values that share commonality.

Q: What are some valuable plan design benchmark metrics to use?

Contribution levels provided by competitors in the industry, in-service distribution rights, plan participation rate, average deferral/savings rate, company contribution amount/percentage, vesting schedule, eligibility requirements, utilization of qualified default investment alternatives (QDIAs), average income replacement ratio, and percentage of corporate payroll put toward the retirement plan.

Q: What is the most important metric for plan design benchmarking?

Average deferral/savings rate typically is the most significant factor in driving participant success toward achieving all other retirement income goals and objectives.

Q: What if one benchmark is significantly below or above the range? 

Formulate a plan or series of steps that can be taken to reach a goal within that range. Typically, this will require utilization or modification of a number of plan design features to improve a specific data point. Keep in mind that there is no requirement to document this type of range—it is the sponsor’s call as to what level of plan design features are implemented.

Q: Is it best to try to be high, low or in the middle of the range of
a plan design benchmark? 

It depends on the role the sponsor wants its plan to play in the competition for talent. Plans offering more desirable features may attract better candidates. Other corporate goals may also play a role. Above average in all metrics is likely the goal; however, goals and objectives should be customized to the specific business and industry.