How (and Why) Employers Should Benchmark Their 401(k) Plans

When sponsoring a 401(k) plan, it’s critical for employers to regularly benchmark their plans to ensure they remain competitive, compliant, and efficient. Benchmarking can help employers not only meet fiduciary obligations but also provide a top-tier retirement benefit that attracts and retains the industry’s top talent.  

Here is some of the guidance we provide clients on the key areas every employer should consider when benchmarking its 401(k) plan.

1. Record-Keeping and Administration Costs

Every 401(k) plan involves a record-keeping and administration provider. These providers handle the logistics of the plan, such as segregating participant accounts, providing employee website access, conducting compliance testing, filing the required Form 5500, and managing transactions. Regular benchmarking of this provider is crucial to ensure costs are in line with the services offered.

Benchmarking doesn’t necessarily require that the employer choose the lowest-cost provider, but rather to ensure that the price aligns with what’s available in the market and the value of the services rendered. Competitive quotes should be gathered every one to three years, focusing on both cost and quality of service.  

Employers should evaluate factors like:

• the user experience of the provider’s website and mobile app for employees;

• the flexibility and range of investment options available;

• the service team's expertise and responsiveness; and

• the provider’s reputation and industry standing.  

For our part, our team has developed measurable scorecards and relies on proprietary rating systems to assess and compare providers. We often recommend that employers develop a set of RFP questions to evaluate providers against and refine them over time. This is something we take the initiative on for clients; our firm maintains an inventory of key RFP questions and answers, which we review and update regularly, as the key criteria for evaluating providers change over time.  

2. Fiduciary Duties and Oversight

One of the most critical aspects of managing a 401(k) plan is ensuring compliance with fiduciary responsibilities, as we explored at length recently here. Employers are tasked with ensuring that the plan is run in the best interest of participants, and a key part of this is regularly reviewing plan operations and investment options.

Best practices include:

• Regularly scheduled retirement plan committee meetings (quarterly, at a minimum) to evaluate plan performance.

• Assessing whether the advisor/consultant is fulfilling their role in monitoring investment performance and overall plan health.

• Ensuring that all compliance processes, such as filings and disclosures, are up to date.

Failing to follow fiduciary duties can lead to costly errors and legal exposure, so regular benchmarking in this area is not just advisable but necessary.

3. Plan Design Benchmarking

Employers should also periodically benchmark the strategic design of their 401(k) plans. The adoption agreement dictates key elements of the plan, such as eligibility requirements, entry dates, and loan provisions. Regular reviews of these features ensure the plan remains competitive and aligns with the company’s goals.

Some factors to consider in plan design benchmarking include:

• Offering Roth contributions, automatic enrollment, and automatic escalation features.

• Flexibility in loan provisions offered to plan participants.

• Comparing your plan's design with similar companies by size, industry, or geography. Your plan design consultants should have access to immeasurable amounts of data, which allows employers to benchmark key plan features against both broad industry averages as well as very specific competitors in their respective industries.  

Plan design isn’t just about compliance; it’s also a strategic advantage in employee recruitment and retention. By offering a flexible, competitive 401(k) plan, employers can stand out in a tight labor market to ensure they are attracting and retaining the most qualified candidates.

4. Employer Matching Contributions

A competitive 401(k) employer match can often be a key factor in attracting and retaining employees. Employers should benchmark their matching formulas to ensure they remain competitive in the marketplace for talent.  

Consider gathering data on:

• The typical matching formula for similar-sized companies or competitors in your industry.

• The total employer contribution, including 401(k) match, profit-sharing, and non-elective contributions.

• The cost of implementing a more competitive match and its potential impact on employee retention and satisfaction.

Being competitive with your match not only supports employee financial wellness; it also boosts your company’s ability to attract and retain top talent.

5. Plan Health Benchmarking

Benchmarking the overall health of the 401(k) plan helps employers gauge how well employees are utilizing the plan. Key metrics include:

• participation rates compared to industry or national averages;

• average deferral rates;

• average and median account balances; and

• loan utilization rates.

By monitoring these key metrics, employers can identify potential areas of concern, such as low participation or deferral rates, which may indicate a need for employee education, plan adjustments, or both.

6. Benchmarking Investment Options

The most fundamental aspect of any 401(k) is the investment lineup. Regularly benchmarking the performance of the plan’s investment options against industry benchmarks and peer groups is vital to ensuring that employees have access to best-in-class, low-cost options.

Each investment should be compared (quarterly, at a minimum) to its peers within the same asset class (e.g., large-cap value funds), using metrics such as:

• performance over various timeframes (e.g., one, three, and five years);

• risk and reward profiles; or

• peer group percentile rankings.

Documenting this process and making changes as necessary is a core fiduciary responsibility, helping ensure that the investments offered align with participants' best interests. “An investment policy statement —or IPS (explained in detail at the preceding link— is essential to provide the decision-making framework related to the plan’s investment lineup.”

7. Advisory Fee Benchmarking

Lastly, it’s essential to regularly benchmark the fees charged by your 401(k) advisor. Your 401(k) Consultant oversees the entire plan, including recordkeeper performance, plan governance, employee education, and fiduciary oversight of the investment menu. Just as with record-keeping and administrative costs, employers should evaluate whether the advisory fees are competitive relative to the services being provided. (Again, it’s not mandated that your plan have the lowest fees; only that you are benchmarking them and offering a diverse set of investment options to participants.)

Independent benchmarking tools available in the market allow employers to compare their advisory fees against industry averages for similarly sized plans. By doing this, employers can ensure they are paying reasonable fees, get value for the services rendered, and remain compliant with fiduciary obligations.

Benchmarking for Success, Ensuring Compliance

Regular benchmarking of your 401(k) plan isn’t just a best practice — it’s a vital part of fulfilling fiduciary responsibilities and maintaining a competitive benefits package. Whether you’re benchmarking costs, plan design, or investment performance, taking a proactive approach ensures that your plan is both compliant and advantageous for your employees.

By following these seven key areas of benchmarking, employers can feel confident that they are offering a 401(k) plan that supports their business goals and meets the needs of their workforce. Communicating such advantages to your existing and prospective employees is what truly maximizes your time and efforts in doing so.

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