Getting the Right Output
In light of multiple lawsuits centered around 401(k) plans in recent years based on a broad range of issues, benchmarking retirement plans has come to the forefront of plan sponsor concerns, says Mike Hager, President of Hager Strategic, Inc., in Washington. The increased awareness of fees, he says, has led to plan sponsors wanting to make sure that the fees that plans and participants are paying are the correct fees. Benchmarking of fees has come to the forefront as one way used to make the determination that fees are reasonable.
However, benchmarking concerns also go beyond intra-plan comparisons and defensive posturing. Internally focused data mining has become increasingly important in recent years. Plan sponsors now feel that not only should a retirement plan exist, but also should be sufficiently utilized, says Kevin Crain, the Head of Institutional Client Relations for Bank of America Merrill Lynch in Hopewell, New Jersey. Sponsors see benchmarking of utilization levels as important to gauge the effectiveness of the plan, he says.
Sponsors now want to know employee enrollment levels, Crain says, and, once enrolled, whether participants are maximizing contributions to get the match, and whether their investments are adequately diversified. Sponsors also want to evaluate whether participants are keeping money in the plan, rather than taking loans or hardship distributions and, if advice is offered, whether participants are utilizing it.
Because of sponsor interest in both internal and external benchmarking, providers are creating more comprehensive tools for benchmarking funds and plan performance for sponsors and advisers to use, says Rich Linton, Executive Vice President of Fidelity Investments Institutional Services Company (FIIS).
Advisers can benchmark key elements of plan performance such as participation rate and asset allocation and compare them to the industry; many times, help can come from the plan’s recordkeeper or investment managers. For example, Bank of America Merrill Lynch benchmarks its plans based on a 10-point system, with 10 being a healthy plan and 0 being an unhealthy plan, Crain says. “Plan sponsors are extremely responsive to the scoring,” he says, “because they feel the need to measure more quantitatively.”
The level of detail these new benchmarking tools provide goes far beyond providing mere averages or means. Averages can hide how a plan is truly performing, says Linton, so Fidelity provides data sets to show how each participant is allocated. This gives advisers the ability to see whether more education is needed or whether advisers should be suggesting changes to the plan design.
Going forward, more products will be available. Advisers will see more Web tools that will allow them to compile and consolidate information for plan sponsors, says Kevin P. O’Connor, Senior Product Manager—U.S. Private Client Services at Russell Investments.
Two of the third-party companies getting into the benchmarking space are BrightScope and Fiduciary Benchmarks. BrightScope gathers data from plan sponsors or publicly available sources to create a BrightScope rating for individual retirement plans. The company says plan sponsors then are able to compare their plans against a group of similar companies.
Last year, Fiduciary Benchmarks and Bdellium introduced the Retirement Readiness Index (RRI), which evaluates how well defined contribution plans are faring based on the success of their participants in preparing for a secure retirement.
Third-party data also can be available to advisers through relationships with service providers. For example, using proprietary data from Fiduciary Benchmarks, RidgeWorth Investments has launched a tool that allows an adviser to benchmark clients’ or prospects’ total plan cost to the costs of other plans in their peer group, while also displaying participant success measures.
Additionally, because advisers work with many plan sponsors, they have their ability to benchmark within their own book of business, Linton says.
The increased plan sponsor focus on benchmarking creates opportunities for advisers. Plan sponsors are seeking guidance from advisers, says Linton. “They’re looking for help on how to provide the right oversight,” he says. Advisers have the benefit of understanding providers, says Linton. There are a number of benchmarking data points advisers can evaluate, he says, including participation rates, asset allocation, deferral rates, and monitoring of investment options.
For advisers reviewing benchmarking products, they should look for products that provide information on individual performance, not just plan averages, says Linton. While it is important to know overall participation rates, he says, understanding the behavior of each participant allows advisers to target advice and materials specifically. In the same way, understanding how each participant allocates his account allows advisers to target educational efforts.
Advisers should look for products that give them specific information about a plan. Benchmarking information around loan activities and distribution are also important considerations, including information as to how and to where assets have rolled over, says Crain.