How to Benchmark Important 401k Plan Data Points

The future 401(k) advisor will perform the following tasks

Here's what to measure moving forward.Here's what to measure moving forward.

In order to be a valued advisor to a plan sponsor or investment committee, the advisor proposition must change. Specifically, how will it change? The future 401k advisor will perform the following tasks:

  1. Benchmarking and evaluating the 401k plan’s overall conformance to fiduciary practices, including:
  • Investment policy due diligence and monitoring
  • Service provider due diligence and monitoring
  • Fee and expense analysis and benchmarking
  • Participant communication and education plans
  • Analysis and benchmarking of 3(38), 3(21), QDIA and/or managed account programs
  1. Benchmarking and evaluating plan measurement data to industry averages. This includes specific goals/outcomes, including the overall plan analysis and demographic breakdown by age of:
  • Portfolio allocation
  • Participation rates
  • Deferral rates
  • Use of model portfolios, target date funds and/or managed account programs
  • Income replacement ratios and analysis

This data will then be organized into a “plan vision statement” for periodic review, as well as to set measurable objectives.

Over the last few years, the industry has moved to “fee-for-service” roles for 401k advisors and focused on investment policy statements, investment due diligence and managing fees and expenses.

Today, most software applications can run and standardize this information—even more so going forward. In fact, many record-keeping organizations are practically giving away non-discretionary fiduciary advice, and partnering with large companies to provide 3(38) services at low basis-point fees to 401k plan sponsors. It’s difficult for traditional retirement plan advisors to compete and charge for this type of advice—especially in this environment.

In addition, with fee reduction pressure on the rise, there’s been a big move to indexing over active management, and it is going to continue.  Lastly, managed accounts as add-on options that allow employees to include other information (besides simply their 401(k) balances) and “step down” risk as retirement approaches are also on the rise, which also minimizes the value proposition of individualized investment advice to an employees.

What value does an advisor bring to the table for the fees charged? The points above should serve as a starting point. In fact, ask the investment committee the following question at your next client meeting:

“What has to happen over the next three years for the committee to be satisfied with the progress of the plan?”

Their answers become that starting point, one for establishing goals that are both measurable and monitored regularly. You will likely need to assist with answers.

“The plan needs to be an employee acquisition and retention tool” is typically heard.  Most fiduciaries stop there and struggle with the next goal, or will answer with something generic like, “We want to increase participation.” It is at this point that the 401k advisor can help define the goal.

As an example, prompt them with the following:  “This is your participation rate now; here is the industry average; here is what some of my other clients have as their goal.”

You can prompt with the same sort of language when discussing the portfolio allocation, use of professional investment advice and the income replacement ratios.

The retirement plan advisor can quantify these goals into the vision statement, one that can be reviewed periodically and used as a measurement tool to drive employee communication and action, and even drive the choice of record-keepers and administrators eventually hired. The data points you measure become the focus of the investment committee meetings and, as a result, overall positive feedback typically increases.

Mario C. Giganti is an owner and chief investment officer of Cornerstone Capital Advisors, a fee-only registered investment advisory firm in Ohio. He is also an adjunct faculty instructor for fi360, a contributing author of Prudent Investment Practices for Investment Advisors and Stewards and a CEFEX registered analyst.

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