How Do You Measure Up to the Competition? Plan Benchmarking.
Why should I benchmark my plan?
As an organization that must compete for employees in today’s marketplace, you want to know how your benefits measure up to the competition. You want to ensure that it gives participants a chance of successfully achieving a good retirement. And as a fiduciary, you want to confirm that your plan is not too expensive for its participants. Benchmarking as a topic is very broad, covering many different areas and addressing several different goals. What kinds of benchmarking should a plan sponsor be thinking about, and how should it be done? Below you’ll find an introduction to this developing area of retirement plan oversight.
What should I benchmark?
There are a multitude of different areas that you could evaluate in benchmarking your retirement plan. Here are a few suggestions that tackle some of the big issues to meet several of the major goals of benchmarking.
Employer contribution rates. While you may think that you offer a good employer contribution, here is where you can assess how your plan stacks up to those offered by other local employers, by other employers in your industry, and by similarly-sized organizations. You may find that to be competitive, you need to make some changes in your employer contribution.
Participation and savings rates. Measuring whether a significant group of your employees says “yes” to participating, and at what rate they are participating, can tell you a lot about the effectiveness of your communications plan, how much your employees value the opportunity, etc. Low rates in these areas can help identify where additional education is needed.
Income replacement ratios. Calculating income replacement ratios for your employees will give you a good idea if they are financially on track for retirement. A good rule of thumb is to ensure participants can save enough to cover 80% or more of their pre-retirement income for at least 20 years.
Plan features. It is a good idea to see how your plan compares to national trends. For example, certain features, such as automatic enrollment and financial wellness, were slow to be adopted at first, but are being offered by more and more plans as employers become more comfortable with the idea. You might want to see where you plan stands in relation to national trends.
Investment Returns. This was the standard benchmark target for years. While things like retirement outcomes are more at the forefront of conversations these days, it is still important to ensure your plan’s investment options offer adequate performance in comparison to the market, and to their own indices. This is a cornerstone of proper plan fiduciary oversight.
Plan costs. Also an essential area to benchmark, ensuring that the plan pays no more than reasonable costs for services rendered is a core fiduciary responsibility. (You can check out our latest post that dives deeper into benchmarking fees here!)
What if I don’t know what to do?
Relax – you are in good company. Many plan sponsors are not well-equipped to carry out all benchmarking efforts on their own. The good news is there are providers who know retirement plans from the inside out, and you may already be working with one or more of them. If not, consider bringing on a partner to perform the necessary benchmarks to ensure you plan is competitive among its peers.
Is there anything else I should know?
While a complete discussion of benchmarking is beyond the subject of this article, it is imperative than any comparison data that is used for benchmarking be independent, and if there are any shortcomings in the data (such as the plans in the sample are significantly larger than your plan), an assessment is made on how big of a concern this presents.
Interested in benchmarking your plan to evaluate how you compare to similar companies? Contact our experts today!