Benchmarking is a retirement plan best practice that allows plan sponsors the opportunity to “take a peak under the hood” of their 401(k). The process allows you to compare your plan to similar plans, measuring key metrics such as participant saving and participation rates, fee reasonableness and service providers. Benchmarking should be a key part of your due diligence process and there are four main areas to focus on when assessing your company’s retirement plan. They are:
-
Plan Design
-
Service Providers
-
Funds
-
Fees
Each aspect of your plan requires a slightly different set of research, analysis, questions and documentation process. In this article, we are going to focus on the best practice of benchmarking funds.
FUNDS
To get started, let’s use a familiar analogy. If your company’s retirement plan was a car, then the plan’s investments would be like the components and features of your vehicle. They would range from the engine and power steering, to features like back-up camera, cruise control, power windows, Bluetooth, and more. The features you select will depend on your preference and driving needs. However, for now, let’s begin with the basic car model – or in the 401(k) world, we call these investment menu options the 404(c) list of funds.
The basic 401(k) investment menu would include five (5) investment categories:
-
Large Cap
-
Small Cap
-
Bond
-
International
-
Stable Value / Money Market
In the car industry that would be like the equivalent of:
-
Engine
-
Transmission
-
Sound system
-
Wheel/tire package
-
Interior
While all of these are necessary for the car to run, there are always options with each selection. Just like a car, your investment menu may offer different types of investment categories. While searching for appropriate investments for your plan, it is a best practice to speak with an investment professional for support. They can help to find, narrow, and provide a list of investment options that aim to meet the objectives of the plan and diversity of the participants.
With the basic mechanics of your 404(c) list established, it’s time to actively monitor, or benchmark, them.
Benchmarking Best Practices:
-
Implement an Investment Policy Statement (IPS)
-
Create criteria for fund selection and removal within the plan
-
Monitor the investment menu
-
Evaluate the cost associated with each investment
-
Possibly hire a 3(38) Investment Manager
-
And very importantly, document conversations, notes and actions