Third-Party Benchmarking Services

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 Defined Contribution Practice Group’s 2012 Plan & Fee Survey.

2Source: Aon Hewitt, 2013 Hot Topics in Retirement

3Source: http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics---Fees

Investment Fiduciary Programs

Provide guidance that maximizes fiduciary protection for clients

Retirement plan fiduciaries are
held to high performance standards and are legally accountable for many aspects of plan oversight. This includes the
time- and resource-intensive endeavor of conducting continual due diligence on the investments offered by a plan.

In the past, this responsibility was shouldered by employers, despite the fact that they were completely unfamiliar with this type of research. This was particularly problematic for small business owners, as many weren’t even aware that they were acting as fiduciaries when it came to selecting and monitoring their plans’ menus.

Today, financial professionals can help employers of all sizes manage their fiduciary exposure by offering investment fiduciary services, either directly or through a third-party vendor.

Providing fiduciary protection can help employers manage risk related to a retirement plan’s investments, and are typically conducted by financial professionals and/or independent investment consulting firms that specialize in manager due diligence and asset allocation.

These individuals and firms assume fiduciary responsibility for identifying and monitoring suitable investment options for retirement plans, taking into account items such as investment performance, organizational changes, style consistency, and expenses.

A program that manages fiduciary risk offers several benefits, including:

• Years of specialized experience—Financial professionals and independent investment consulting firms have insight into areas that are mostly unknown to individuals acting as fiduciaries.
• A degree of safety—Protection may be provided for employers against certain claims and expenses brought about by employee lawsuits.
• Improved investment selection—A formal process for protecting against fiduciary risk helps ensure that employers create an appropriate investment menu through documented procedures. 

Two of the most popular approaches to providing investment fiduciary protection are designated 3(38) and 3(21) fiduciary protection. The primary distinction between the two is discretionary authority over the selection and monitoring of plan investments.

3(38) Fiduciary Protection	3(21) Fiduciary Protection
Level of Protection
A financial professional or consulting firm assumes full fiduciary responsibility and discretion for the plan's investments and acts as an investment manager.	A financial professional or consulting firm shares fiduciary responsibility with an employer for the plan's investments.
Investment Selection
An employer selects the initial investment menu from an approved fund list options. A financial professional or consulting firm manages the menu from there.	An employer creates the investment menu from the approved fund list. A financial professional or consulting firm provides recommendations for how to update it going forward.
Best for
Employers looking to hand over control of ongoing investment decisions in return for complete fiduciary coverage.	Employers who want to stay involved in the investment selection process while reducing fiduciary liability.

With the Department of Labor currently working to re-define what it means to be a fiduciary, there’s a strong possibility that investment fiduciary services will gain greater prominence in the retirement plan landscape. In fact, all asset managers in a Cerulli Associates survey of investment-only managers expect this to be the case.

For retirement plan fiduciaries that are required to always act in the best interests of plan participants, investment fiduciary programs offer reduced risk exposure and a simple way to oversee a plan’s investments. They also provide an added layer of independent protection that allows financial professionals to provide both the guidance their clients depend on and the coverage their clients seek.

1Source: Cerulli Quantitative Update, U.S. Retirement Markets 2012.

Open-Architecture Investment Platforms

Offer a diverse range of investments to suit any retirement strategy

In the days of guided architecture (or focused investment platforms), employees often had to choose from an investment menu containing proprietary funds to build their retirement strategies. Investment platforms were limited, and fund lineups were therefore more constrained.

In the 21^st century, open-architecture investment platforms can help employees avoid investment restrictions.

Developed to accommodate a broad range of investment needs, platforms today seek to ensure that financial professionals and employers can construct plan investment menus that are consistent with their Investment Policy Statements.

Industry trends and statistics show that these platforms are now the standard for modern retirement plans, as they have made substantial gains in popularity and usage over the past 10 years.

According to Cerulli Associates, the shift to open-architecture investment platforms is evidenced by the growth of defined contribution investment-only assets and the diminished use of proprietary-only investment products: 75% of 401(k) assets were addressable¹ for investment-only managers in 2011, compared with 50% in 2003.²

Furthermore, Ernst & Young notes that a majority (79%) of wealth management firms plan to add open-architecture investment platforms to their overall client and product strategies within the next two to five years.³

Open-architecture investment platforms are favored because they can support any combination of proprietary and non-proprietary strategies, along with both traditional and non-traditional investment options that include:

• mutual funds
• ETFs
• stable value funds
• collective trust funds
• unitized company stock
• alternative investments

These platforms are also flexible enough to adapt to new developments—such as target date funds and model portfolio solutions—that can address distinctly different employee investment preferences.

A 21^st century retirement plan allows employees to select from a wide range of fund families and investment options in order to choose the best investments for their retirement needs. This makes open-architecture investment platforms an essential retirement plan tool for both financial professionals and employers.

1Addressable assets are defined by Cerulli Associates as those in which the plan is not restricted to using a recordkeeper’s proprietary investment product.

2Source: Cerulli Quantitative Update, U.S. Retirement Markets 2012.

3Source: Ernst & Young 2011 US Wealth Management Study: A Focus on Product and Client Trends.