Fee benchmarking is the process of comparing your 401(k) plan costs with the industry average rates. Comparing your 401(k) plan fees to other plans within a similar range is one step that you can take as a fiduciary to ensure that costs associated with the plan are fair and reasonable for the services provided. We often get asked about fee benchmarking, so we went ahead and reviewed several independent benchmarking platforms. We discovered that although the reports seem very informative, they can actually be quite misleading if you don’t consider the pool of data that is aggregated in the platform and how scores are calculated.
As a plan sponsor and fiduciary to the plan, it is important that you understand the plan fees as they relate to the services provided. Plan fees can be structured in various ways and can be confusing when comparing between different services providers. Some providers might receive compensation through revenue sharing and therefore show lower recordkeeping or administrative fees. Payroll providers may “bundle” 401(k) fees into the payroll costs rather than reflecting true recordkeeping or administration fees, which reduces accuracy of published fees.
Each of the plan fees are associated with a particular service where quality should be accounted for as part of a comprehensive review. Fee benchmarking often focuses strictly on expenses – without consideration of value proposition. Plan sponsors and fiduciaries should consider the value of the provider, including factors such as compliance, consulting, financial wellness, education and participant support.
Pool of Data:
Fee benchmarking platforms compare a plan against plans with similar demographics, such as total plan assets and number of participants. However, it is critical to understand how many plans are in the database and whether there is a large enough pool of data. For example, if data is only aggregated from ten recordkeepers, the fee benchmarking will not accurately reflect the fees across the industry. Additionally, some benchmarking providers utilize 5500 data for the reports. Since 5500 filings do not actually include all plan fees (i.e. fees invoiced to the company or revenue sharing), 5500 data alone is not sufficient for a comprehensive fee analysis.
Some fee benchmarking services allow their clients (the providers) to adjust variables which will skew the report and make them appear more favorable. This customization feature can enable providers to differentiate themselves by highlighting tools or services that are not typically offered by other providers. An explanation of how the report is generated or customized is key to understanding how the report represents fees in relation to value proposition.
Fee benchmarking can be a great tool for plan sponsors to ensure that their plan fees are fair and reasonable and also help to fulfill a fiduciary responsibility. Since each fee benchmarking platform has a unique process for aggregating and reporting data, plan sponsors should consider how various data sources, pools of data or report customizations may impact the accuracy and reliability of the report.