Present employers with an easier way to measure value for cost
In 2012, the Department of Labor (DOL) issued rules requiring certain
retirement plan service providers to clearly and effectively communicate
expense information to employers and employees. The goal of this
disclosure was to assist plan fiduciaries with understanding the costs for
services provided.
The requirement offered financial
professionals a unique opportunity to demonstrate their skills and expertise in
terms of making it easy for employers to analyze and compare providers.
To take advantage of that opportunity, some have engaged third-party
benchmarking services to help employers conduct a thorough review of service
providers for their retirement plans. Main areas of focus include recordkeeping
services, trust services, and the plan’s investments. In addition to looking
closely at expenses, the range and quality of services provided is taken into
consideration.
While third-party benchmarking services don’t completely replace traditional evaluation practices, they can offer a more cost-effective and objective way to carry out and document a prudent retirement plan review. In the past, financial professionals had to take on cumbersome reviews alone, usually by soliciting and analyzing requests for proposals (RFPs) from a number of providers. This involved sifting through copious amounts of data to determine if there was good value for cost.
Since RFPs didn't always provide a true “apples-to-apples” comparison of plans, this proved to be an arduous task. The questions were standardized, but the responses varied greatly. In the end, financial professionals and their clients were left to seek additional information elsewhere or make judgment calls without complete certainty.
Today, third-party benchmarking makes it easier to obtain:
- Plan comparisons that show what an employer is getting relative to what is happening in the marketplace in similar plans
- Facts that are broken out to objectively analyze:
- Plan design features
- Employee success measures
- Employer and employee services
- Documentation for fiduciary purposes
The recent emphasis on fee disclosure has made third-party benchmarking services a valuable tool for comparing pricing among providers, as the information provided can go a long way toward helping financial professionals and employers choose the most appropriate services for their plans.
According to independent investment consulting firm NEPC, vendor comparisons in 2011 resulted in savings, on average, of 40% on recordkeeping costs.1 Furthermore, a study by human resources consulting firm Aon Hewitt found that 52% of defined contribution employers are interested in working with a third-party benchmarking service in 2013 to compare fund, recordkeeping, and trustee expenses. This is up from 35% the previous year.2
In addition to potential cost savings, third-party benchmarking services can help satisfy DOL and ERISA fiduciary requirements, as they demonstrate that a prudent process has been followed for:
- selecting and monitoring plan investment alternatives and plan service providers; and
- ensuring that service provider costs and other plan expenses are reasonable in light of the level and quality of services provided.3
The current regulatory and legal environment has made financial professionals and their clients more accountable for determining the reasonableness of expenses and the suitability of investment offerings. Third-party benchmarking services can assist them in satisfying their fiduciary obligations by providing the data that can help them analyze the elements that will ultimately lead to successful plan operation and high-quality service.
1Source: NEPC’s Deļ¬ned Contribution Practice Group’s 2012 Plan
& Fee Survey.
2Source: Aon Hewitt,
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