Monthly Archives: January 2017

The Many Virtues of “Benchmarking”


Plan sponsors in the public sector use the Request for Proposal (RFP) process as an easy (though time-consuming) and reliable way to obtain market information.   A well-constructed RFP and evaluation process can be invaluable. It permits the plan sponsor to make decisions on plan design, administrative services, investments, fees and participant services on a regular basis. It also helps in fulfilling some, but not all, fiduciary obligations.

As helpful as the RFP process is, it is not the only tool a fiduciary should use to gauge the effectiveness of their defined contribution plan. For one thing, the RFP process is usually conducted once every few years. In the current environment, the market changes nearly daily, so an RFP process every five to seven years simply doesn’t keep up with what is going on in the market. However, it would be inefficient to use an RFP process more frequently because the process itself is time consuming and, depending on local or state bid or procurement rules, entails a lot of extra work to obtain basic information for comparative purposes. So, the RFP process is a necessary and important tool that should be used every five to seven years; but it must not be your only measurement tool.

In between the regular RFP cycle, there are other options that should be used by plan sponsors to be certain they are fulfilling their fiduciary duties. One such tool was discussed in this column last November. A regular “Due Diligence” process is an excellent tool to use every couple of years to supplement the RFP activity. This provides an easy and informative way to obtain information on what other plan sponsors are doing, and how their program compares to your program.  [See article on this topic below or under archives for November, 2016].

Another tool is a simple Benchmarking Study. Information from your most recent RFP and your most recent Due Diligence study can easily be placed into a spreadsheet and updated regularly. The items you would want to benchmark are:

  • Administrative Fees
  • Investment Management Fees
  • Participation
  • Average Deferral Rates or Amounts
  • Auto-Enrollment and Auto-Escalation details
  • Default Options
  • Year Over Year Investment Performance (of Asset Classes) Opposite Benchmarks

Once you have identified the “similarly situated” plan sponsors in your Due Diligence study, it is easy to record and update these critical measures (and others) to demonstrate whether your plan is improving over time compared to benchmarks, or going backwards. Benchmarks can be measurements you pick as objective, and/or are those of similarly situated plans you have identified as part of your peer group. Consistent and accurate measurement of features for your plan, compared to your peer group are very important. If you plan is not improving when compared to your peer group over time, you may have a problem.

Benchmarking key items, and keeping them updated, is an excellent way to demonstrate to participants that you are fulfilling your fiduciary duties by continually monitoring key items and improving your plan. It is easy to lift benchmarking data from the Fund Performance Review prepared by you or your consultant and put it in the Benchmarking Study. The key is to keep the Benchmarking Study simple and current. Be sure to measure the relevant items that you have determined to be important measures of “good plan governance.”

The RFP process, Due Diligence Study, and Benchmarking are all key tools that make fulfilling your fiduciary obligation easier and more effective in the long run.  Don’t make the mistake of just relying on the RFP process alone to fulfill your fiduciary obligations to plan participants and their beneficiaries.