As an employer, offering a 401(k) to your employees is a great way to retain a motivated workforce while attracting new talent. But, like most retirement vehicles, there are some legal points to keep in mind.
First, by offering a 401(k) to your employees, you are now considered a plan sponsor. Second, as a sponsor, you have a fiduciary duty to ensure that all fees paid by the 401(k) are reasonable, according to the Department of Labor.1 An effective way to judge these costs is by asking your financial professional about benchmarking your 401(k).
What Is 401(k) Benchmarking?
Benchmarking is a way of organizing, reviewing, and evaluating a 401(k) to learn if it is competitive, as well as a good fit for a business. In addition to evaluating the fees associated with your plan, solid benchmarking may also consider the range and quality of services offered. This can help you make an informed decision about what the plan provides or what may need to be updated to make it a better fit for your business.
Here are a few items your financial professional may evaluate when benchmarking your 401(k).
Costs and Expenses
As your company's 401(k) grows, you can expect that the costs involved in maintaining it will grow as well. Some providers do not automatically adjust their plan fees, and in some cases, the plan may outgrow the provider.
Much like plan costs and expenses mentioned above, as your company continues to change and grow, so will its needs. In some cases, evaluating the services offered can uncover if a business has outgrown its plan.
Your financial professional can evaluate your 401(k)’s design and features to determine potential opportunities for improvement. This could include the terms in the plan document, auto-enrollment or, in some cases, Roth features.
Once the benchmarking is complete, you’ll need to evaluate the results. In particular, you'll want to make sure your business is comfortable with fees being charged or the investment options offered. This is also a good time to take stock of additional features, such as automatic enrollment or automatic escalation. For example, does your 401(k) include a Roth option or the ability to make post-tax contributions? And if not, is this something your business needs?
Decision-Making Based on Benchmarking
Once you and your financial professional have gone through the above steps, it's time to make a determination.
If benchmarking your 401(k) shows that you've found a great fit, then no further action may need to be taken. But if your plan doesn’t fulfill your company's needs, it may be time to make a change. It may be beneficial to approach your plan's provider with the findings of your 401(k) benchmark. Providers are often likely to work with you to find the best fit for your company, especially when provided with documentation of where their product fails to meet the needs of your business.
Finally, remember that a comprehensive benchmark of your plan can be helpful, but it will no doubt take some time to complete. However, the value inherent in understanding how you measure up to others in your industry while also fulfilling your fiduciary responsibilities can go a long way toward your business’s long-term success.