Monday, November 16, 2015

Best Practices in Benchmarking 403(b) Plans

Barbara Williams, CFA
Managing Director
Bridgebay Financial, Inc.

This article addresses some of the best practices in benchmarking 403(b) plans as a guide for plan sponsors.

Periodic benchmarking of your 403(b) plan is a normal due diligence process that should be conducted by an independent retirement plan advisor or consultant that is well-informed and has experience working with multiple service providers.  This broad experience allows the third-party advisor to properly benchmark your plan against other plans and service providers in the defined contribution market, namely, ERISA-covered and non-ERISA plans. 

The Department of Labor (DoL) has signaled that such a review should be conducted every 3-5 years.  Plan sponsors should conduct a request for information (RFI) through an independent retirement plan consultant to benchmark plan services, fees and administration as a best-practice and document good fiduciary practices.  Refreshing plan features and services assists nonprofit retirement plan sponsors who are dedicated to their participants' ability to have positive retirement outcomes.

Ideally, the independent retirement plan advisor conducting the benchmarking study should not be associated or affiliated with the current or prospective plan provider.  Also, the advisor should not have any conflict of interest or be able to benefit financially from selecting or recommending any specific provider. 

A critical element of the benchmarking process is proper and thorough documentation.  The evaluation criteria must be specifically defined in order to unequivocally demonstrate that an impartial, balanced, and comprehensive review was conducted and that the final decision is rational, defensible and free of any potential conflicts of interest.  Such documentation will definitively exhibit the prudent process for the DoL and demonstrate that the chosen solution was for the benefit of the plan participants. 

The due diligence process should incorporate a review of the recordkeeper's financial strength, delivery of services, plan compliance, reporting services, plan sponsor services, participant services including education, quality of investment choices and fees.  Fortunately, recently mandated disclosure requirements now enable the plan sponsor to receive better information and greater transparency concerning services and total costs.

On the investment side, many plans rely on the recordkeeper's affiliated investment team to provide investment reviews quarterly.  From a fiduciary perspective, it is also a best-practice to conduct a deep-dive of the investments using an independent third-party investment consultant at least annually to provide an impartial review of the quality, diversification and cost of the investments.  By conducting an annual deep benchmarking review of the plan by an independent consultant the sponsor can still benefit from the recordkeeper's quarterly investment input while also enhancing fund, plan and provider oversight.  This third-party perspective is a tremendous fiduciary benefit that the plan recordkeeper simply cannot provide.

Multiple Providers
When compared to 401(k) plans and other defined contribution plans, 403(b) plans offer many more investment options to their participants on average.  Typically, when multiple vendors are used, many of the investment options are redundant and may not necessarily be best-in-class.  This redundancy in investment options can lead to participant confusion, inertia, poor asset allocation and higher costs for participants.  The use of multiple providers can present complications when trying to evaluate a particular 403(b) plan with regards to its peers. 

Nonprofit plan sponsors with multiple providers with different investments and embedded costs may require retaining an experienced retirement plan consultant to streamline the plan.  Many 403(b) sponsors find it advantageous to move to a single provider with an efficient cost structure and investment offerings that best benefits the participants. 

Understanding Plan Fees
The implementation of 408(b)2 in 2012 represented a major step in assisting plan sponsors in understanding plan fees, re-negotiating those fees and gaining a better understanding of the costs associated with the services being provided.  In many cases, providers have updated the services and expanded their platforms to better serve their clients in an effort to retain existing business.  All of these developments are positive for the discerning 403(b) plan sponsor.

Enhancing Plan Features
There are numerous features in plan design that sponsors can employ to increase the success of their plan and participants' retirement outcomes.  Some key design features include auto-enrollment of current and new employees, auto-deferral, auto-deferral increase, and selection of a Qualified Default Investment Alternative (QDIA).  Providing enhanced participant information on projected retirement savings and income replacement by retirement age are also important participant incentives to increase the success of the 403(b) plan.

The current trend is to de-emphasize participant education and focus on plan design features that optimize participation, asset allocation, and maximize deferrals.

Planning for the Future
When using independent third-party consultants, it is important that the retirement plan adviser have specific experience in an ERISA environment, even if the 403(b) plan is non-ERISA.  This experience and background will ensure that the plan sponsor is attaining the highest standard of prudent care and is implementing best practices.  The advisor should be able to draw from the practices of a wide range of providers so that if the plan services are determined to be limited, outdated, or overpriced, the advisor will be able to recommend better solutions.

Retirement plans offered at different nonprofit organizations are at different stages of development.  Advisors that are familiar with more evolved retirement plans can "see the future" and are able to lay out a blueprint for success.

Many qualified retirement plan advisors that have historically advised 401(k) plans can contribute significantly to 403(b) plan sponsors.  Their expertise and fiduciary knowledge gained from operating in a ERISA world can benefit nonprofit organizations that are now progressing into an ERISA fiduciary environment.  An advisor well-versed in ERISA standards can effectively apply that same level of due diligence, prudence and fiduciary standards to the 403(b) plan of a nonprofit organization. 

Fiduciary oversight of a 403(b) plan has become a challenging role for many plan sponsors, especially if their administrative responsibilities are still burdened with multiple vendors.  Periodic plan benchmarking is a critical function for all plan fiduciaries, regardless of the retirement plan type or size.  Benchmarking helps plan sponsors upgrade plan services, plan design and participant services at a competitive price.