Evolving regulations mean plan sponsors continue to face increasing scrutiny when it comes to their fiduciary responsibilities. A recent analysis of 50,000 retirement plans in Texas by 401(k) administrator Abernathy Daley highlights a concerning trend: many plan sponsors are potentially overpaying on fees, putting themselves at risk of violating their fiduciary duties.
On its face, the solution is simple: More frequent benchmarking. As in, every year.
BenefitsPro recently interviewed Steve Abernathy, Principal and Chairman of Abernathy Daley 401K Consultants, “to discuss this fiduciary failure that has resulted from a lack of benchmarking plans, and, more importantly, how employers, especially HR, can utilize benchmarking audits to avoid legal risks, lower costs, and improve their employee’s long-term financial health.”
Benchmarking is an independent assessment of workplace retirement plans, and a crucial tool for plan sponsors to ensure they’re meeting their fiduciary obligations. These audits involve a comprehensive review of various plan components, including:
- Investment options
- Administrative services
- Recordkeeping fees
- Overall plan design and structure
By conducting regular benchmarking, plan sponsors can identify areas where they might be overpaying for services or underperforming compared to industry standards, according to Mr. Abernathy. This proactive approach not only protects the plan sponsor but also ensures participants are getting the best value for their retirement savings.
Despite their importance, many employers are unaware of the steps needed to protect their business and employees through proper benchmarking. Some common challenges include:
- Lack of in-house expertise to conduct thorough benchmarking
- Time constraints and competing priorities
- Difficulty in obtaining and interpreting complex fee structures
- A lack of understanding of how advanced technologies can lower prices, or a belief that plans are already competitively priced
- Unclear benchmarks for comparison across the industry
According to Mr. Abernathy, benchmarking has declined in recent years. This can be attributed to several factors:
- Misconceptions about plan competitiveness
- Overreliance on bundled service providers
- Lack of awareness about potential legal risks
- Cost-cutting measures that view benchmarking as non-essential
For plan sponsors, failing to conduct regular benchmarking audits can lead to:
- Potential legal liabilities for breach of fiduciary duty
- Overpaying for plan services, impacting participant outcomes
- Missed opportunities for plan improvements and cost savings
Advisors servicing retirement plans should stress the importance of regular, annual benchmarking to their clients. By helping plan sponsors navigate the complexities of benchmarking, advisors can:
- Strengthen client relationships
- Demonstrate value-added services
- Help protect clients from potential legal, financial, and fiduciary risks
As regulatory scrutiny continues to increase, plan sponsors and their advisors should prioritize regular benchmarking audits. By doing so, they can ensure compliance with evolving regulations, fulfill their fiduciary responsibilities, optimize plan costs, and ultimately provide better outcomes for plan participants.
