In part two of this educational Benchmarking Your Company’s 401(k) video series, you’ll learn how to benchmark the performance, investment risk, and behavior of the investments in your 401(k) retirement plan. We’ll also discuss the types of funds in your plan, how different investment share classes can affect your total 401(k) fund fees and costs, and the importance of employee engagement.

 

Transcript:

Hi and welcome to Benchmark Your 401(k) - Part 2. In this video we cover the final three key areas to benchmark in your 401(k) plan.

Before jumping into a sample benchmark of an investment menu, it's important to note fund quality and value. As with many things, paying the lowest cost may not be the best value.

Four factors to consider are:

  • Performance. How has the fund performed compared to a benchmark?
  • Risk. Different fund types have different risks associated with them. Does your 401(k) plan have a mix of investments available for your employees?
  • Manager experience. How long has the fund manager been in place? What is their track record? Are there several managers or one? Or is it an index fund that's managed by an equation?
  • Additional factors, such as does the investment behave like the category of investments it's in? It turns out, that is important for understanding investment quality.

Now let's look at an investment menu benchmark. Here's a sample investment benchmarking report from a third party. Green is good. The brighter the better. Yellow is marginal and our view is that anything showing as light green or yellow should be on the watch list. That doesn't mean it necessarily gets removed from the fund lineup, but just that a careful assessment is made. In this example, there are no reds. But if there were, you'd need to pay attention. Any reds need careful consideration.

You want to evaluate your fund lineup annually or when there's news about the funds. Like if there has been a corporate action that could affect them. Ideally you'll reach out to your adviser to help with this.

Here's a benchmarking snapshot from the vehicle industry. First, they looked at their investment menu and how many funds it included, compared to similar companies. They uncovered that 26 funds are typically offered in their industry, but their 401(k) plan included 90 options, many unused.

Second, they looked at types of funds in their menu. Target date funds were missing in their fund lineup, but 58% of the industry benchmark included target date or age-based funds. You can have mutual funds, exchange traded funds, ETF's, collective investment trusts, CIT's and index funds, for example. But all have expense ratios. Expense ratios are the cost to your employees of investing in a fund, and they can vary widely.

Not all funds are created equal, and one of the main differences between them is based on the funds share class. For example, share class A has very high expense ratios but share class R has much lower expense ratios. Typically, the amount of money invested in your 401(k) plan provides access to different share classes, but why would you ever want to pay 1.25% when you can pay .25%?

Now let's talk about revenue sharing where other service providers are paid for by your fund's expense ratio. You'd pay 1.25% instead of .25% when you want the fund to pay your adviser or recordkeeper out of the fund fees. Revenue sharing funds aren't always more expensive. However, it's just more confusing to benchmark them because they can include fees for the fund and service providers. In the case where revenue sharing is included. You have to break down the expenses for each fund to understand your total plan costs. And for funds without revenue sharing, you're still paying those other costs, just directly to the service providers.

Which brings us to total plan cost. You want to calculate your plan costs to see if they are comparable to others in your industry, and if they are reasonable against the services you receive. So we're going to look at the plan costs, whether or not your investment funds include revenue-sharing, and then look at additional costs either covered in the funds or charged separately and were going to do a cost comparison. Think of this like asking three major cell phone carriers to provide a price quote. Each cell phone company has a different monthly cost and they each send you a bill that looks different from the others. It's only when you compare them side-by-side or benchmark costs that you can learn the true costs. The same is true with retirement plans and costs. They're calculated differently based on the service provider.

Here's an example of cost breakdown by service providers for different companies. You can see that their total fees are fairly aligned, but the fees are charged differently. To uncover all the costs associated with your plan, you'll need to gather these documents: asset statements, service provider invoices, and your plan 408(b)(2) statement from each service provider. Here's a sample report of the total plan costs. First, you can see how your plan compares to the benchmark group and to the average plan. Then you can see the breakdown of fees by service provider and the total plan costs.

There is one more extremely important area to focus on, employee engagement. Your 401(k) plan is a valuable employee benefit, but Americans are unprepared for retirement. One in three Americans report having absolutely no retirement savings. When you look at the type of service your 401(k) providers offer, check to see: Are there investment options that they will use? Are there ongoing educational opportunities? And most importantly, will someone sit down to walk them through how to save? Employee engagement metrics to look at include how your employees are tracking to retirement, your employee participation rate, and how much of their salary your employees are saving. Remember, your employees need your help. Through thoughtful and purposeful actions, you can help them achieve a successful retirement outcome.

Benchmark your 401(k) plan. That way, you know and have documentation that your plan is competitive, fees are reasonable, and you and your employees are getting a good value and  service for those fees. You can ask your adviser to do a total plan benchmark, you can ask us to do it, you can do it yourself, or ask an independent third-party -- but no matter what, you want to benchmark your plan every few years.

Thank you for watching. We hope you found this video series valuable. Please call 1-866-607-5150. If you have any questions about benchmarking or want to learn more about our services.

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