Benchmarking Retirement Plans
by Trey Fairman, AIF, J.D., LL.M. June 27, 2021
Expert Interview: Long Term Care Insurance
November 10, 2020
Benchmarking is used in many industries to track progress or determine reasonableness. So,
when it comes to 401(k) plans, how does one know what is reasonable? What are reasonable
fees? What are good investment options? It sounds simple - and should be - but unfortunately,
it's often not easy.
The goal is to understand what is appropriate relative to other options. Therefore, it's essential
for you, the one responsible for overseeing your company's plan, to know how it compares to
Start by asking, "how are we doing?" In the retirement plan industry, it's called "benchmarking"
and it's considered a best practice. It involves looking at what you have to determine if it's
appropriate or needs updating. Benchmarking helps satisfy fiduciary obligations and optimize
plan features by providing insights to help your plan incrementally improve and keep you out of
Benchmarking compares your plan to similar plans, measuring key performance indicators such
as participation rates, deferral percentages, fee reasonableness, and service providers.
Reviewing your retirement plan should be a regular part of your due diligence. Here are some
common questions addressed in benchmarking.
How does my plan stack up?
Industry averages vary drastically depending on the size of your employee base and the assets
in your plan, so it's critical to benchmark your plan against similarly sized companies. There are
numerous websites where you can obtain information.
Can my plan do better?
After getting a sense of how your 401(k) stacks up to your peers (and where it could use a bit of
tuning), the next step is to evaluate alternatives. Even if your plan is above average in every
category, you could gain a lot by switching providers. Improvements in technology have added
personalized features and modern tools that make retirement planning easier for plan sponsors
and their employees.
Benchmarking keeps plans up-to-date with new regulations and protects against exorbitant
fees. For example, small plans (with less than 100 participants) who do not benchmark may
carry costs as high as three percent per year. Comparatively, plans that benchmark regularly
pay 1.5 percent or less in annual fees. High fees act like an anchor on performance. Demos.org
found these fees can rob participants of nearly 35 percent of their total returns over a lifetime.Let me pay you the compliment of being blunt. No matter how skilled the advisor is or the
extent of your relationship with them, they should never receive one-third of the plan's returns
over the long term. It’s not reasonable and shouldn't happen…ever. But you only learn that by
Even if you get regular advice from an advisor, you may benefit from a second opinion. Many
plans outgrow their original "call me when you need me" advisor. Sadly, many 401k plans don't
get the help they need because their advisor is not a 401k specialist. Best practices in the 401(k)
world have evolved from a casual, informal investment conversation to a much more
formalized and regulated fiduciary oversight process. So your plan reviews must address more
than just how your mutual funds performed last year. Much has changed since 2006, but many
advisors and the plans they advise have yet to keep up.
Knowing how your plan compares to others helps protect your plan, your employees, and