Plan Benchmarking - Guiding Light
Benchmarking can entail much more than assessing the fund performance of various investment managers and gauging which vendor offers the most advantageous fee structure to plan sponsors. It also can involve looking at the internal workings of a plan to monitor how well it is serving its participants—evaluating things such as plan participation, deferral rates, and retirement-income adequacy. And benchmarking can go beyond the basics of funds and fees to plumb deeper into a vendor’s operations to determine whether the fit is right for a particular client.
Here are five topics for advisers to take into consideration as they hone their benchmarking practices or help plan sponsor clients with the process for the first time.
The date that all advisers need to circle on their calendars is January 1, 2012, the day when the Department of Labor’s fee disclosure rule—408(b)(2)—is supposed to take effect.
“That is going to mark a paradigm shift in the world of benchmarking,” says Bruce Harrington, Director of Retirement and Product Strategy for John Hancock Financial Network, because all fees will have to be made transparent, and all plans will have to benchmark to show that their fees are reasonable. He points out that, although some advisers already have been benchmarking plans and vendors, it becomes an inherent and essential concept under 408(b)(2). The rule requires that plans determine whether the fees they pay are “reasonable,” although what is reasonable and what is not has yet to be defined. Although ERISA has always required plan sponsors to ensure their plan fees were reasonable, previously, fees have not had to be disclosed.
Advisers, especially those who already benchmark their clients’ plans regularly, have a real opportunity, through 408(b)(2), to promote their value to sponsors, because they can promote their past experience in benchmarking and their knowledge of the marketplace. Many small plans have not benchmarked their fees previously, so the adviser will need to make sponsors aware of their new fee transparency responsibilities under 408(b)(2). The adviser then can lead the plan sponsor to establish benchmarking standards that not only will meet the new rule’s standard, but also will evaluate a plan’s effectiveness from both a qualitative and quantitative perspective, suggests Michael George, formerly Brinker Capital’s Director of Retirement Plan Services.
The process of benchmarking actually begins before the benchmarking begins.
Advisers should take the lead in designing the benchmarking process and shaping the parameters of the discussion. “There are so many areas that can be benchmarked that the adviser can set the stage for their value in the areas where they want to add value,” says Stig Nybo, President of Transamerica Retirement Services. Advisers need to be involved in the entire benchmarking conversation with their clients. This conversation can be as basic as deciding on the appropriate time frame for benchmarking: quarterly, semi-annually, or annually.
And, although the benchmarking should first consider which recordkeeper and investment manager will be best for the plan itself, advisers might want to look beyond that and consider which firms offer the best services and assistance to the adviser. What types of services, for instance, do vendors provide to help advisers build, maintain, and grow their practices? The more a recordkeeper and investment firm can do for an adviser, the greater amount of time the adviser will have to dedicate to plan sponsors. So, advisers need to benchmark a vendor’s software, investment analytics, fee disclosure policies, and training and education programs, for example. The technology and processes that vendors use also can come under the benchmarking umbrella. Some vendors have relationship managers who work specifically with advisers. That can be an important factor to consider if gaining immediate access to a vendor is an important consideration for an adviser. Expenses and investment products, obviously, are the big items, but these other, ancillary services and practices also can help an adviser bring greater efficiencies to a plan’s operations, says Nybo.
When benchmarking investment managers and recordkeepers, do not just look at the numbers.
Sure, fees and fund performance are vitally important, says George. But they do not tell the whole story when trying to gauge which vendor makes the best partner for your clients. Benchmarking can be a powerful tool for also assessing the way a vendor will offer its services and relate to a plan’s fiduciaries and participants. Comprehensive benchmarking touches on everything from a firm’s relationship manager to its education program, from the operations and processes of the back office to the reputation of its executive suite. It can measure the degree to which providers help plan officers comply with laws and regulations and meet their fiduciary responsibilities. It is not always easy to get a grip on all of this information, but for those advisers who can, they have a huge advantage in being able to accurately benchmark which vendor will work the best for a client. And sometimes it is the little things, like how much time a vendor gives to a client or the accessibility of a call center, rather than cost and investment performance, that help cement a strong relationship between a sponsor and a recordkeeper or investment manager.
Ascertain that sponsors adhere to benchmarking objectives that are established to help a plan operate at full throttle.
Benchmarks are not merely set to meet due diligence standards. They should be used to gauge and enhance a plan’s efficiency and its effectiveness in helping participants meet their retirement goals. “Hold the plan sponsor accountable for meeting the benchmarks they set,” says Nybo. Benchmarking can be seen as a four-step process, he says: goal setting, planning, execution, and measurement. The adviser can begin by letting the sponsor know where it should be on the spectrum and then set benchmarking standards for getting there—and beyond. If a benchmarking goal is to hold quarterly education meetings or to raise participation to 75%, the adviser should ensure the sponsor achieves those objectives—or understand why the sponsor fell short.
“There’s a lot of noise in our industry right now,” says Nybo. “Somebody needs to provide clarity for us. This benchmarking process can allow the adviser to take this role and provide clarity for the plan sponsor.” To achieve that clarity, the adviser can work with the sponsor to set mileposts for where it eventually wants to be. By employing benchmarking, the adviser and sponsor can then work toward moving from one milepost to the next. “If you want to move the needle, you need to know where the needle is,” Nybo explains. And, if there is no movement, benchmarking can help show the sponsor what needs to be fixed.
The surest way to benchmark is to take a client’s plan to market.
The popular way to benchmark vendors is to measure them against members of their own peer group—those of like size that offer similar products or services. But a more comprehensive way to benchmark recordkeepers and investment firms is to go into the market and allow vendors to bid on a client’s defined contribution plan business. “That gives you the truest form of competition,” says Eric Endress, an Investment Analyst for Cleveland-based CBIZ Financial Solutions, Inc. Sometimes plans grow substantially in size, with assets doubling or tripling, yet the fee structure remains the same. If an adviser is unable to negotiate lower fees, benchmark in the most direct way possible by requesting bid proposals from other providers.
Of course, fees should not be the only deciding factor. By seeking bids on a client’s business, the adviser also should be benchmarking services like call centers and account statements, education programs, and the amount of time and service a provider’s relationship manager is willing to give to a plan. Benchmarking by going out to bid also can enable an adviser to measure how much bang a plan will get for its buck. Higher fees are not always a bad thing if they cover ancillary services like enrollment meetings, call centers, and mailings to employees that a less expensive provider may not include as part of its basic portfolio of services.
—Louis Berney
In the Middle
Most 401(k) plans have moderate fees
Total plan costs for running a 401(k) can vary widely but, for most employers, the range between high and low total plan costs is moderate, according to the 401k Averages Book.
For a 401(k) plan with approximately $2,000,000 in assets, the range between the high- and low-cost providers averages around 1.33%, while the range for the middle 50% of the universe is .31%.
“Our data shows that, yes, the range between high and low costs can be significant, but most 401(k) plan costs are going to be grouped around the median,” said David W. Huntley, co-publisher of the 401k Averages Book.
According to the 401k Averages Book, the range between the high and low cost for a 50-participant plan with $2,500,000 in assets is 1.24%, while the range for the middle 50% of the universe is .29%. The median total plan cost for this plan size is 1.49%.
The disparity between high and low costs is largest for plans with smaller plan assets and more participants. The 401k Averages Book study shows that the range of total plan costs for a plan with 200 participants and $2,000,000 is 1.48%, while the range for the middle 50% of the universe is .32%. The median total plan cost for this plan size is 1.70%.
Huntley said, “With all the focus on fee disclosure and 408(b)(2), it’s important employers and their advisers compare their fees to a benchmark and understand where they fit into the range of costs in the marketplace.”
—Rebecca Moore
DC Plan ParticipantsInvesting in More Funds
On average, defined contribution plan participants include 5.3 funds in their accounts in 2011—nearly double what they had in 1996, according to a Spectrem study.
Spectrem said that, while this partly reflects an increase in the average number of funds plan sponsors offer—from 6.3 to 19.4—it is also a sign that investors are increasingly focused on diversifying their retirement portfolios. Thirty-seven percent of participants cited diversification as the number one reason for using more funds.
In 2000, the average number of funds was 3.4, and as recently as 2005, participants were investing in 4.6 funds. In addition to an increase in the number of funds being offered, Spectrem attributed the growth in number of funds used to the increase in participant education efforts.
About half (50%) of the participants in the Spectrem survey had some or all of their DC assets invested in asset-allocation funds, up from 36% in 2008, and a larger portion of participants are using the asset-allocation funds for some of their money, from 13% in 2008 to 24% today.
About 72% of investors had some form of asset-allocation fund offered within their plan; some had lifestyle funds, many had target-date funds, but the largest percentage (34%) had both types of funds available in the plan.
Spectrem said the popularity of asset-allocation funds is expected to increase as investors become increasingly comfortable with relying on the investment expertise of providers. —PA