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.
Investments
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.
Conclusion
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.
