Every retirement plan has fees – that’s a given. When 401(k) plans are provided by employers as part of their employee benefits, it becomes their duty as a fiduciary to ensure that the fees are maintained at reasonable levels.
Why? As an employer offering a 401(k) plan to your employees, it’s important to ensure that the fees associated with the plan are reasonable and competitive. Not only is this a fiduciary responsibility, but it also affects the overall success of the plan and the financial well-being of your employees.
In 2023, there are new fee benchmarking requirements that employers need to be aware of to ensure compliance and avoid potential penalties.
What Does it Mean to Benchmark a 401k?
401k benchmarking involves reviewing and assessing a company’s retirement plan to ensure that it complies with industry and ERISA standards, thereby serving as a due diligence process to verify that the plan provider is fulfilling their fiduciary responsibilities.
Moreover, given the evolving landscape of investing and retirement planning, it’s crucial to keep a 401k plan current. This involves evaluating the plan’s design, different service providers, investment options, and associated fees.
How 401(k) Benchmarking Works
401(k) benchmarking is a critical process for ensuring that a company’s retirement plan remains competitive and meets the necessary standards. While a 401(k) plan offers convenience and is a popular option for retirement investing, it is the company’s responsibility to ensure that the plan is performing well.
Through an annual check-up, the firm assesses the plan’s design, evaluates its fees, and reviews the services provided by the plan provider.
Preventing Costly Mistakes in 2023: Your 401(k) Benchmarking Checklist
This process reduces the risk of violating ERISA rules, protects plan participants and beneficiaries, and can ultimately save the firm money. The Employee Retirement Income Security Act (ERISA) mandates minimum standards for retirement plans and requires the plan sponsor to verify that the 401(k) plan has reasonable fees.
Review the Plan’s Fees
Employers should review the fees associated with their 401(k) plan to determine if they are reasonable and competitive. This includes investment-related fees, administrative fees, and any other fees associated with the plan.
Benchmark the Fees
Employers should benchmark the fees associated with their plan to those charged by other similar plans in the marketplace. This can be done using a third-party benchmarking service or by conducting a survey of other plans.
Evaluate of Plan Features
While the primary goal of any 401(k) plan is to help employees meet their retirement goals, recent years have seen a shift in what employees want from their benefit plans. Conducting a full review of your plan will allow you to evaluate current plan features and make changes as necessary based on your employee demographic. Analyze plan participation numbers and engagement rates, and consider implementing automatic enrollment or offering an employer match, Roth, and additional after-tax contributions to incentivize employee participation.
Additionally, ensure that employees can easily access information on how to take full advantage of the retirement plan, such as financial wellness resources and access to licensed representatives who can help with investment selection, debt management, home buying, and saving for college education.
Ensure You Maintain Proper Documentation
When faced with an audit, how can you prove that you’ve met your fiduciary obligations? The answer lies in having documented processes based on facts.
As an employer, it’s your responsibility to offer a variety of investment options to your employees, each with different cost levels, in their best interests. Active funds, for instance, are usually more expensive than passive index funds. However, it’s important to assess the overall benefits to your company and employees before making a decision.
Your plan must have an investment policy statement that directs investment decisions. After the IPS is established, you can select a list of fee-friendly investment options that align with the IPS. As a sponsor, you must document this process, as well as the following aspects as they relate to fees:
- What is the total cost?
- What is the record keeper’s fee?
- What is the advisor’s fee?
- What is the fee charged by individual investment companies?
Employers have often been penalized or required to reimburse employees for mismanaged fees due to a lack of documentation and process in litigation. As an employer, you don’t have to have the cheapest fees; you just need to ensure that you’re “acting with loyalty and prudence” and that the fees are justified.
Review Compliance Procedures
The effects of inflation are being felt across the board, including by plan sponsors and advisors who are experiencing rising costs for managing and operating retirement plans. In anticipation of increased Employment Retirement Income Security Act (ERISA) penalties due to inflation, plan sponsors and advisors should take action now to prevent and mitigate potential impacts. This involves a review of compliance procedures, such as automated collection of funds and information, notifications, and compliance report filing.
With penalties for non-compliance on the rise, ensuring that automated systems are functioning properly can help prevent unexpected and unwelcome penalties. It’s important to budget accordingly for the possibility of having to pay inflation-increased penalties in case mistakes occur.
Provide Fee Disclosures
Employers should provide fee disclosures to plan participants annually. These disclosures should be clear and concise and include the investment-related fees and administrative expenses associated with the plan.
Take Action as Needed
If the benchmarking process reveals that the fees associated with the plan are not reasonable or competitive, employers should take action to address the issue. This may include renegotiating fees with service providers, changing service providers, or taking other steps to reduce plan costs.
An Approach to Benchmarking 401(k) Plans
Benchmarking 401(k) plans is an essential step in ensuring that you offer a competitive package to your employees. An independent review can help you compare your plan with other similar plans and provide recommendations if necessary. It’s important to document valid reasons if your fees appear to be high, such as providing additional services like a 24/7 help desk, educational programs, or translators for non-English-speaking employees. These factors may be important to employees and result in higher costs.
However, it’s not always ideal to have the lowest fees, as this can indicate a lack of quality services or a limited investment lineup. Therefore, it’s crucial to have an advisor who can bid out your plan to several providers every three years, compare the options, and negotiate on your behalf to ensure you don’t change plans unnecessarily.
The new fee benchmarking requirements for 401(k) plans in 2023 are designed to ensure that plan fees are reasonable and necessary for the administration of the plan. Employers should take the necessary steps to comply with the regulations, including reviewing the plan’s fees, benchmarking the fees, documenting the benchmarking process, providing fee disclosures, and taking action as needed. By doing so, employers can fulfill their fiduciary responsibilities and help their employees achieve financial success in retirement.
Learn More About 401(k)Plans
Employers should create an effective 401k communication plan that helps employees make informative decisions for retirement.
Contact RWM today to review your existing 401k or talk through a plan of action to offer retirement savings to your employees.
This information was developed as a general guide to educate plan sponsors but is not intended as authoritative guidance or tax or legal advice. Each plan has unique requirements, and you should consult your attorney or tax advisor for guidance on your specific situation. In no way does the advisor assure that, by using the information provided, the plan sponsor will be in compliance with ERISA regulations.