Defined contribution and defined benefit plans are extremely complex, which has led to an industry devoted solely to administering and ensuring the proper compliance of these plans. As a general rule, the more customized a plan becomes, the more expensive it becomes to administer. And to be clear, there’s nothing wrong with having a highly customizable plan, as it typically is designed to meet the Plan Sponsor’s specific needs.
However, when engaging a benchmarking study to determine the reasonableness of plan fees, highly customized retirement plans create significant noise in the benchmarking analysis. In other words, comparing the fees of a Safe Harbor 401(k) plan and ESOP plan provides little value for the Plan Sponsor.
As mentioned, benchmarking plans with a similar plan design is essential to creating a useful benchmarking study. Similar plan design is just the tip of the ice berg, and any meaningful benchmarking study will select a benchmarking peer group using multiple criteria to ensure that the fee comparisons between plans employ a fair, “apples to apples approach”.
Beyond plan design, the most meaningful criteria used to select a benchmarking peer group are:
• Total Net Assets
• Total Participants
Why Total Net Assets?
Investment management fees, which typically encompass the majority of the plan’s fees, are often charged as a percent of Total Net Assets. Furthermore, these fees are generally charged as a lesser percent as Total Net Assets increase.
Why Total Participants?
Recordkeeping fees are typically charged on a per participant basis (e.g. $15/participant) and generally are the next highest fee to the plan after investment management expenses.
Any benchmarking study that does not employ the necessary level of analysis in selecting a benchmarking peer group will be very misleading and provide the Plan Sponsor with little to no ability to determine the reasonableness of plan fees.
Please contact Mike Bourne at 858-673-3690 x109 to further understanding and discuss benchmarking your retirement plan. Atessa will be happy to provide a complimentary “total plan fee” estimate based on your plan’s publicly available fee disclosures on Form 5500.