How to Benchmark a Retirement Plan

Benchmarking an employer-sponsored retirement plan helps to ensure that the retirement benefits offered by a company are competitive, efficient, and beneficial for both the employees and the organization. The primary aim is to assess the plan's performance, costs, and overall effectiveness compared to industry standards and best practices. This article outlines 10 key steps and considerations involved in benchmarking a retirement plan, helping employers make informed decisions to enhance their retirement benefit offerings.

1. Define Objectives and Scope

Before beginning the benchmarking process, it is essential to define the objectives and scope of the assessment. Employers should determine what aspects of the retirement plan they want to evaluate, such as investment performance, administrative costs, employee participation rates, and overall plan design. Clear objectives will guide the benchmarking process and ensure that the evaluation is comprehensive and focused on relevant areas.

2. Gather Plan Data

Collecting detailed data about the current retirement plan is the next crucial step. This includes information on plan design, investment options, fees, participant demographics, and overall plan performance. Employers should also gather data on employee participation rates, contribution levels, and retirement outcomes. This comprehensive data collection will provide a baseline for comparing the plan against industry benchmarks.

3. Identify Relevant Benchmarks

Selecting appropriate benchmarks is critical for a meaningful comparison. Employers should consider industry standards, peer group comparisons, and best practices. Relevant benchmarks can include:

• Industry Averages: Compare plan performance and costs against industry averages to gauge how the plan measures up.
• Peer Group Comparisons: Benchmark the plan against similar companies in the same industry or region to identify competitive advantages or areas needing improvement.
• Regulatory Standards: Ensure compliance with regulatory requirements and best practices as outlined by agencies such as the Department of Labor (DOL) and the Internal Revenue Service (IRS).

4. Evaluate Investment Performance

One of the most important aspects of a retirement plan is the performance of its investment options. Employers should assess the investment performance by comparing the plan’s returns against relevant benchmarks, such as market indices or peer group performance. This evaluation should consider factors such as risk-adjusted returns, consistency of performance, and alignment with the plan’s investment objectives. Many employers seek the expertise of retirement plan advisors to conduct a thorough investment performance analysis.

5. Assess Plan Costs

Evaluating the costs associated with the retirement plan is essential for ensuring its efficiency. Employers should analyze both direct and indirect costs, including administrative fees, investment management fees, and any additional charges borne by participants. Comparing these costs against industry benchmarks will help identify areas where the plan may be overpaying and provide opportunities for cost savings. Transparency in fee structures and regular fee audits are recommended best practices for managing plan costs.

6. Analyze Employee Participation and Engagement

The success of a retirement plan also depends on employee participation and engagement. Employers should analyze participation rates, deferral percentages, and the overall contribution levels of employees. Comparing these metrics to industry averages and peer group data can highlight areas where employee engagement may be lacking. Additionally, employers can conduct surveys or focus groups to gather feedback from employees on their satisfaction with the plan and any barriers to participation they may be experiencing.

7. Review Plan Design and Features

The design and features of a retirement plan can significantly impact its effectiveness. Employers should review the plan’s design elements, such as eligibility criteria, vesting schedules, contribution limits, and employer match formulas. Benchmarking these features against industry standards and best practices will help ensure that the plan is competitive and attractive to employees. Employers may also consider offering additional features, such as automatic enrollment, automatic escalation, and “help me do it” investment options (such as target date funds and pre-mixed asset allocation portfolios), to enhance the plan’s appeal and effectiveness.

8. Evaluate Plan Administration and Service Providers

The quality of plan administration and the performance of service providers play a crucial role in the overall success of a retirement plan. Employers should evaluate the efficiency and effectiveness of plan administration processes, including record-keeping, compliance, and participant communication. Benchmarking the performance of service providers, such as third-party administrators and investment managers, against industry standards can help ensure that the plan is well-managed and cost-effective. Regularly reviewing service agreements and performance reports can help maintain high standards of administration and service delivery.

9. Consider Employee Education and Communication

Effective employee education and communication are vital for maximizing the benefits of a retirement plan. Employers should assess the current strategies for educating employees about the plan’s features, benefits, and investment options. Benchmarking these efforts against best practices can help identify areas for improvement. For example, employers may consider implementing regular workshops, webinars, or one-on-one financial counseling sessions to enhance employee understanding and engagement. Clear, concise, and accessible communication materials are also crucial for ensuring that employees are well-informed and can make sound decisions regarding their retirement savings.

10. Implement Improvements and Monitor Progress

After completing the benchmarking process, employers should identify areas for improvement and develop an action plan to address any deficiencies. This may involve renegotiating fees with service providers, enhancing employee education and communication efforts, or redesigning plan features to better align with best practices. Employers should also establish a regular monitoring and review process to track the plan’s performance over time and ensure that it continues to meet the needs of both the organization and its employees. Periodic reassessment and benchmarking will help maintain the plan’s competitiveness and effectiveness in a dynamic regulatory and economic environment.

Final Thoughts

Benchmarking an employer-sponsored retirement plan is a vital process for maintaining a competitive and effective benefits offering. By defining clear objectives, gathering comprehensive data, selecting relevant benchmarks, and evaluating key aspects of the plan, employers can gain valuable insights into the plan’s performance and identify opportunities for improvement. Regular benchmarking and ongoing monitoring will help ensure that the retirement plan remains a valuable and attractive component of the overall benefits package, ultimately supporting the long-term financial well-being of employees and the success of the organization.

It’s also important to involve key stakeholders in the benchmarking process, including human resources and finance, as well as employee representatives. Collaborative efforts can provide diverse perspectives and ensure that the benchmarking process is thorough and aligned with organizational goals. Regular updates and transparent communication with stakeholders throughout the benchmarking process can foster a sense of ownership and commitment to implementing recommended improvements.