Looking Deep Into a Plan
Top retirement plan advisers have been benchmarking plans for years, with the available tools evolving as more and more specialists get into the game and as the focus on participant retirement outcomes increases. Benchmarking tools can offer a holistic checkup of the plan, against its goals and against its peers. Now with the 408(b)(2) “fee reasonableness” deadline looming, advisers have additional tools to determine and document plan fees as part of a plan sponsor’s fiduciary responsibility.
Whether for prospects or existing clients, the added expertise of the adviser to interpret a benchmarking report and recommend plan changes helps to highlight his value. “Smart advisers are using it as a marketing tool to distinguish themselves from the pack,” says Bob Francis, former chief operating officer at National Retirement Partners and founder of Gale Force Consulting. “They explain how benchmarking works, how the data is segmented and how it uniquely applies to what the client’s plan is trying to achieve.”
“Benchmarking is an important part of the fiduciary process,” says Jamie Worrell, managing director of 401(k) Advisors in Providence, Rhode Island. “There are a variety of good tools out there; there’s not a ‘one-size-fits-all’ option. Every case is different, so it’s important to know what the tools are, [in which situations] they best fit and how to use them accordingly.”
Cost is also a factor when selecting benchmarking tools, yet, as with plan fees, it is relative, based on the value of the benchmarking report to the plan. In many cases, defined contribution investment only (DCIO) providers, other providers or recordkeepers offer proprietary tools or access to third-party benchmarking tools as a value-add for advisers.
When selecting an independent, third-party benchmarking tool to be used with or for plan sponsors, sources suggest three considerations:
1) Sources of data. Benchmarking tools differ widely on the sources of data they apply. “For us, the No. 1 consideration is to determine where the data comes from and whether or not it uses relevant comparisons,” says Henry Yoshida, principal at Austin-based Maresh Yoshida 401k Group. “It’s important to check for an ‘apples-to-apples’ comparison, using similar plans in similar industries, with a comprehensive sample size.”
The Advisor Lab’s Retirement Plan Diagnostic benchmarks plans against other plans of similar asset and participant size (+/- 10%) using the most current Form 5500 data from more than 1.1 million plans, with the adviser providing the fund names or symbols to pull in Morningstar and Lipper data. PlanTools relies on its user base, consisting of advisers, broker/dealers, third-party advisers (TPAs), banks, insurance companies and mutual fund companies, to input plan data for benchmarking purposes. “Our data from 1,200 plans is organically grown,” says David Witz, PlanTools’ managing director and founder.
Fiduciary Benchmarks Inc. (FBi) receives its data directly from service providers. With thousands of plans coming in, it focuses on keeping the data accurate and ensuring the quality of benchmark group comparisons between plans. Craig Rosenthal, FBi’s senior vice president, and adviser for sales and service, says, “We guarantee we’ll benchmark the plan against a group of at least 25 plans, across a minimum of 10 different recordkeepers and a minimum of two different recordkeeper business models.”
2) Scope of benchmarking. While Department of Labor (DOL) regulations under the Employee Retirement Income Security Act (ERISA)—specifically section 408(b)(2)—have the industry focused on fee reasonableness, benchmarking providers track the business in many other ways—from fees only to fees plus a wide scope of plan design and plan success measures.
PlanTools uses plan assets or participant count to benchmark fees for the services provided against other plans of similar size, without attempting to specifically assess or score perceived value. It identifies eight primary categories of expenses and numerous service lines within each category. “We benchmark what the regulations require,” says Witz. “While fee benchmarking doesn’t do a very good job of determining some of the subjective issues, it’s a great quantitative measure to help the plan sponsor document a prudent decision as to fee reasonableness for the services rendered.”
The Advisor Lab and FBi take a more holistic view. For Rosenthal, it’s “making sure you understand what you’re getting for what you’re paying. Service and value components should always be viewed right alongside fees. It’s not about low fees. It’s about reasonable fees.”
Both firms believe that to determine fee reasonableness you must tie the fees to some metric of success involving both qualitative and quantitative measures. FBi looks at fee components and what it believes are most of value to the plan, including participant success measures, plan complexity, fiduciary support, plan services, participant services and service standards.
In addition to commissions and fees versus a plan’s peers and industry, The Advisor Lab tracks investment return, plan participation and plan utilization, along with asset class diversification. According to John Resnick, director of advisor development at The Advisor Lab in Philadelphia, “Our reporting helps advisers clarify not just an overall dollar amount but who is getting how much and for what.”
3) Ease of reporting. A report need not be overly complex nor try to compare a plan to the entire 401(k) universe but, instead, should provide meaningful information in an easy-to-understand format that allows both the plan sponsor and adviser to document and guide meaningful actions.
“As we focus on the small to midsize plan market, most plan sponsors that we work with do not even know where to start in reviewing their plan,” says R.J. Reibel, manager of the Retirement Plans Division at Edelman Financial Services. “Keeping it simple for the client, so they can understand and act on the analysis, is essential.”
The Advisor Lab’s Retirement Plan Diagnostic report draws from DOL and third-party investment research data and enables advisers to simply input the plan name and current investment names or symbols to generate a 12-page report in about 10 minutes. “Advisers tell us it helps them simplify the complex [data] and communicate meaningful metrics in an easily-understood format,” says Resnick.
Within an hour, an adviser can enter fee data via PlanTools and produce more than 15 different fee reports of one to two pages each. Says Witz, “We provide an integrated 408(b)(2) report to accommodate descriptive disclosure requirements, a revenue-sharing database and a micro-site, customized for the adviser, that electronically date-stamps the report.”
FBi provides an executive summary highlighting how the plan stacks up on fees, plan design and participant success—measures that plan sponsors can put in their fiduciary files with any notes—and an appendix that supports all the summary data. Once it receives a signed plan sponsor authorization via the adviser, FBi generates a report 10 business days after the recordkeeper supplies the plan data to the firm. Says Rosenthal, “Our reports have to be accurate and comprehensive so plan fiduciaries can make good decisions for their plans.”