Plan and Individual Benchmarking

The convergence of benchmarking results
Reported by Rebecca Moore
Josh Cochran

Plan benchmarking and participant benchmarking are evolving, and the two increasingly converge as plan advisers work with sponsors to improve participant outcomes.

There are data points at the plan level that make sense to benchmark that would not make sense at the participant level, says Robert C. Lawton, president of Lawton Retirement Plan Consultants LLC, in Milwaukee. He says most advisers benchmark plans every year, using a service such as Fiduciary Benchmarks—a third-party, objective benchmark provider.

According to Lawton, the real driver motivating plan sponsors to benchmark every year is fees. This springs directly from the Employee Retirement Income Security Act (ERISA) Section 408(b)(2) regulations, but also from the fact that benchmarking can be effective in reducing fees. “If plan sponsors didn’t experience meaningful provider fee reduction as a result of benchmarking, they would stop doing it,” Lawton says. However, there are other things plan sponsors gauge, such as the prevalence of certain design features, overall participation and the structure of investments.

Mark Olsen, senior consultant at PlanPilot in Chicago, says that with plan benchmarking, more plan sponsors than ever are interested in what others are doing and how their programs compare with their peers’. PlanPilot is a retirement plan consulting firm that partners with clients, as a fiduciary, to help control risks.

According to Olsen, considerable benchmarking data is recordkeeper-specific, evaluating just the clients of that recordkeeper. Firms such as PlanPilot, however, offer comparisons of plans of many sizes in many industries and regions. “We can say, ‘Here’s how your plan looks, relative to our database, and here’s how your plan compares with other plans of your size or in your area,’” Olsen says. PlanPilot’s database includes approximately 215 plans that represent nearly 300,000 plan participants.

Benchmarking Summed Up

Donn Hess, head of product development at J.P. Morgan Retirement Plan Services in Overland Park, Kansas, has found there are three questions that seem to sum up plan benchmarking best. The first is, “What fees are you paying?” Hess says that when advisers benchmark fees, it gives their plan sponsor clients some sense of whether they are paying market-competitive rates.

The second question is, “How complex is your plan?” Benchmarking the complexity of a retirement plan helps a plan sponsor determine whether it pays competitive rates, Hess says. Advisers can help plan sponsors measure whether the services they get are on par with, above or below the standard. If services are below the standard, they are not worth the cost.

Lawton says advisers are comfortable with interpreting the data for plan sponsors. A report from Fiduciary Benchmarks offers sections about plan complexity—a topic that may be difficult for plan sponsors to understand. A complex plan may have many contribution sources: employee pre-tax, Roth or other post-tax deferrals, an employer match or profit sharing. Another way a plan may be complex is by having a variety of distribution options.

Hess’s third question in the summary of benchmarking is, “What outcomes is your plan driving?” This is when plan advisers look at participants’ income replacement rates and continue to measure them to see if they improve. But there are also sub-metrics to benchmark, such as investment performance, participation and deferral rates, and what participants do when they leave the plan. These measures can predict outcomes—ultimately, whether participants will attain an appropriate income replacement rate in retirement, Hess says. This is where plan and participant benchmarking converge. “Plan sponsors are looking at what they’re paying and what outcomes they’re getting; both are focused on the progress of participants for a successful retirement,” Hess says.

Benchmarking is less about factors than it is about the interaction of factors, he observes. For example, automatic enrollment is a great way to improve participation, but if advisers look at what drives better outcomes, auto-enrollment affects only new hires. If a company has substantial turnover, auto-enrollment will have a big impact on participation. If there is little turnover, it will take longer to affect participation significantly. Plan advisers must look at participant demographics to help explain what they find when they benchmark a plan, Hess notes.

To get the participant piece of the benchmarking puzzle, there really is no third-party, objective firm that can benchmark participant-related data, Lawton says. However, he notes that large consulting firms release surveys all the time. Plan sponsors may also use survey information from industry support groups such as PLANADVISER’s sister publication, PLANSPONSOR magazine, or the Plan Sponsor Council of America (PSCA).

Still, publicly available surveys may lack some of the information a plan sponsor needs. In those cases, if the sponsor has a relationship with a consulting firm or recordkeeper, the plan adviser may ask that provider to run a report against the sponsor’s participant base. For example, Lawton says, if a plan sponsor is concerned that younger participants may be investing too conservatively, the adviser may be able to receive, from the recordkeeper, an on-demand report that shows, by age group, how the participants select their investments.

According to Lawton, how plan advisers would use these materials is two-fold. First, advisers can use the information to evaluate whether the plan design helps in meeting the plan’s goals—for instance, whether any automatic features are working to promote better retirement outcomes. Second, it can help them with employee education—for example, a push may be needed if some employees contribute less than the amount needed to receive the maximum match.

“When thinking about employee education and plan design, look at survey data, actual outcomes and plan sponsor goals; [then] marry those things together to develop education and … plan design that evolve participant outcomes,” Lawton says.

“We are seeing increased focus on revisiting plan design,” Olsen concurs. He notes that a number of plan sponsors altered their match contributions during the financial crisis, and many are now rethinking their match. They are not going back to old formulas, though, but trying to determine the best match design to help participants save more on their own, he says.

Advisers are also increasingly promoting automatic enrollment and, more importantly, automatic deferral escalation. Roth options, too, are getting more consideration, Olsen says, especially for younger employees. Finally, plan sponsors are comparing vesting schedules with their peers’ and designing schedules to increase the vesting of employer contributions, while also rewarding employees who stay.

“One of the things we are able to do is look at savings patterns of people based on age and tenure,” Olsen says. For instance, PlanPilot may find that, for a manufacturing firm, 10-year employees have a savings rate heavily influenced by the plan’s design when they entered the plan. If the employer matched up to only 3% of pay when the participants enrolled, they may still defer only up to that point. If the plan has changed to match 6% of pay, those participants likely have not caught up. “We tell the client we think the plan design is better, but there’s a whole segment of participants not taking advantage of it,” he says.

According to Olsen, the most important thing to consider is whether the plan is of value for meeting the needs of employees. “Maybe budgets are tight and plan sponsors want to spend dollars on more tangible results, but having a budget allocated to plan design and looking at it more holistically will benefit plan sponsors in the future,” he says. “Looking at funds is great, but that won’t affect everyone. Putting more into plan design will influence participants of all demographics.”

Tags
Benchmarks, Participants, Plan design,
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