How can 401(k) benchmarking help plan sponsors manage 401(k) plan fees, meet fiduciary responsibilities, and improve retirement outcomes?
401(k) benchmarking is the process of comparing retirement plan fees, investments, and services against similar plans to determine whether costs are reasonable, fiduciary obligations are being met, and participants are receiving maximum value from the plan.
When managing a workplace retirement plan, attention is often placed on total plan assets, average account balances, and investment performance. Yet, plan fees can have a meaningful impact on participant outcomes, especially when compounded over time.
This is where 401(k) benchmarking comes in. Benchmarking your plan’s fees and services is more than a best practice; it’s a fiduciary responsibility. Let’s take a look at why it matters and how even a few basis points can influence long-term retirement readiness.
Why 401(k) Benchmarking Matters
Simply put, 401(k) benchmarking is about accountability. It is not about chasing the lowest possible fees. It entails making sure that the 401(k) plan fees being paid are reasonable for the services delivered and in line with what similar plans pay in today’s market.
Regulators have made it clear: fiduciaries are expected to understand plan fees, compare them to market standards, and take action when costs exceed those of comparable plans. Beyond compliance, benchmarking can help participants pay less in fees, keeping more of their money invested and growing toward retirement.
The Power of Basis Points
One basis point, or 0.01%, doesn’t sound like much. But over time, that small difference can have a big impact.
If your plan has $25 million in assets, 10 extra basis points in fees adds up to $25,000 per year, every year. Over a 30-year period, those dollars and their lost compounding potential can significantly erode participants’ savings.
What to Look For in a Retirement Plan Cost Review
A thorough retirement plan cost review should examine:
- Investment fees: Are lower-cost share classes or CITs (Collective Investment Trusts) available?
- Recordkeeping and admin fees: Are they competitive as compared to plans of similar size and structure?
- Advisory or consulting fees: Are the services clearly defined and aligned with the fees being charged?
- Revenue sharing: Is it happening, and if so, is it easy to understand and fairly structured?
How to Ask and Where to Find Fee Information
A great place to start is the required annual fee disclosure from your service providers, commonly known as the 408(b)(2) disclosure. It outlines all direct and indirect compensation being paid from plan assets. That becomes your starting point.
Ask your providers:
- What services are included in the fees?
- How do these fees compare to plans of similar size and complexity?
- Are there lower-cost investment options to consider?
If answers are vague or incomplete, it’s a red flag. A good provider will be transparent and proactive in helping you assess the value being delivered.
How Often Should You Benchmark Your Plan?
Many plans will benchmark annually. But to stay current and meet compliance expectations, a deep-dive benchmarking review should be conducted at least every three years. If your plan sees significant growth, changes providers, or updates the investment menu, it’s wise to review sooner.
Your retirement plan is not a set-it-and-forget-it benefit. As your company and the industry evolve, benchmarking helps support cost management, market comparisons, accountability, and participant outcomes.
Investment Modernization: A Natural Outcome of Benchmarking
Benchmarking can help align your plan with the market and evolving participant needs. As part of the process, plan sponsors could:
- Consider CITs, ETFs, or index funds as a lower-cost alternative to traditional mutual funds.
- Re-evaluate target date funds for glide path design and income strategy.
- Add managed accounts to give participants access to personalized advice, private equity, and/or custom portfolio creation.
- Offer retirement income solutions to help participants turn savings into sustainable income.
These updates may lead to stronger engagement, better decision-making, and improved participant outcomes over the long term.
Better Benchmarking, Better Participant Outcomes
When benchmarking is done right, participants keep more of their savings, pay only for services that add value, and gain access to the tools and investments that can help them retire with greater confidence.
Let’s make your next retirement plan cost review count. Contact us to get a second opinion on your current 401(k) plan fees and uncover opportunities to optimize costs and outcomes for your participants.
Frequently Asked Questions
What is 401(k) benchmarking?
401(k) benchmarking is the process of comparing your retirement plan’s fees, services, investments, and features against similar plans in the marketplace. The goal is to determine whether costs are reasonable and whether participants are receiving appropriate value.
Why is benchmarking a 401(k) plan important?
Benchmarking helps plan sponsors evaluate plan fees, assess service providers, support fiduciary responsibilities, and identify opportunities to improve participant outcomes. It also provides documentation that fiduciaries are monitoring plan expenses and services.
How often should a 401(k) plan be benchmarked?
Most retirement plan professionals recommend reviewing fees annually and conducting a comprehensive benchmarking study at least every three years. Plans experiencing significant growth, provider changes, or investment lineup changes may benefit from more frequent reviews.
Are plan sponsors required to benchmark 401(k) fees?
ERISA does not specifically require benchmarking, but fiduciaries are expected to ensure that plan fees are reasonable for the services provided. Benchmarking is one of the most common ways to demonstrate prudent fee oversight.
How do high 401(k) fees affect participant outcomes?
Higher fees reduce the amount of money participants keep invested. Even small differences in fees can compound over time, potentially reducing retirement account balances by thousands of dollars over a participant’s career.
Investment Advisory Services offered through Cambridge Investment Research Advisors Inc., a Registered Investment Advisor. We cannot accept trade orders through email or voicemail. PK Retirement, LLC and Cambridge are not affiliated, and Cambridge does not offer tax advice.
This information was developed as a general guide to educate plan sponsors and is not intended as authoritative guidance or tax/legal advice. Each plan has unique requirements, and you should consult your attorney or tax advisor for guidance on your specific situation.
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