Balancing effectiveness with efficiency: Plan benchmarking
As DOL legislation 408(b)(2) goes into effect this year, plan fiduciaries will receive new fee disclosure from their service providers. Sponsors will need to proactively determine the reasonability of these disclosed fees and services. A small industry of plan benchmarking service providers has developed services to help advisors efficiently evaluate fees, plan demographics, and services. As you discuss these benchmarking reports with your clients, their plans may become more effective from two main conversations about the benchmarking report.
1. You can add perspective by helping the plan sponsor understand the underlying assumptions and process in plan benchmarking tools.
2. You can help plan sponsors recognize plan benchmarking tools may be an efficient way to fulfill legal and fiduciary responsibilities, but plan sponsors should not confuse a favorable benchmark study with creating an effective plan (For more on attributes of effective plans see Seven Attributes of Excellent Plans).
The greatest impact on a plan benchmarking study is its data source. Most benchmarking services get their data from the IRS Form 5500, surveys, recordkeepers, and/or advisors. Each of these sources has inherent strengths and biases. Listed below is a high level overview.
Benchmarking data sources
Understanding the strengths and biases of the source data, provides you the knowledge to put the benchmarking reports into perspective for your clients. As you use and review benchmarking reports, other places where you can add unique perspectives include creating appropriate plan peer groups, unregistered products like stable value or fixed accounts, and plan complexity fees. Plan benchmarking reports may give an efficient view of the plan relative to other plans, but the unique perspectives you provide on the benchmarking reports help your clients to create effective plans–solidifying your trusted relationship with your current and prospective clients.