Corporate retirement plans have become more scrutinized as companies face lawsuits, penalties, and reputation risks related to 401(k) and 403(b) plan mismanagement. Abernathy-Daley’s primary research indicates that nearly 80% of mid-to-large-sized companies are overpaying for plan administrative fees due to the lack of regular benchmarking. Without independent audits, employers may overspend and risk non-compliance with fiduciary obligations mandated by the Employee Retirement Income Security Act (ERISA).
For employee benefits professionals and financial executives, regularly benchmarking fees and services is a practical way to reduce costs, protect the organization from legal exposure, and support employee retirement outcomes.
The Hidden Costs of Neglecting Regular Benchmarking
Fees remain high for outdated services, creating unnecessary costs. Companies paying a large portion of administrative costs on total plan assets often overpay by tens to hundreds of thousands of dollars. The majority of companies that do not conduct a regular benchmark review of their retirement plans are likely to miss opportunities to align with the latest market standards, leaving potential savings on the table. The implications of this oversight extend beyond finances; companies could be violating ERISA fiduciary standards and risking lawsuits.
ERISA requires plan sponsors to maintain reasonable fees and thoroughly disclose investment costs. What constitutes “reasonable” can vary based on factors such as plan size, service level, and market competitiveness. Failing to meet these standards can have weighty financial consequences. In recent years, numerous companies have faced lawsuits for excessive fees. One example is General Electric, which recently settled for $61 million to resolve claims that it overcharged 401(k) participants due to poor fund choices. There’s also the Cunningham v. Cornell case involving Cornell University’s 403(b) plan, which was reviewed by the Supreme Court. The suit alleged that the university breached its fiduciary duty by failing to exercise prudent care in overseeing and controlling administrative fees within its 403(b)-retirement plan. It’s not an abstraction; to avoid risk. plan sponsors must remain vigilant about compliance, including the alignment of fees with emerging best practices.
The Consequences of Fiduciary Neglect: Common Compliance Pitfalls
Companies are at risk of several compliance issues, all of which come with potential financial and reputational repercussions. Here are four of the most common pitfalls that companies face:
- Inaccurate Plan Design, Implementation, and Profit-Sharing Missteps: Many companies encounter plan structural and implementation issues, especially relating to profit-sharing elements, in their retirement plans. For instance, a poorly implemented profit-sharing plan might disproportionately reward high earners or exclude eligible employees. Mismanagement of these plans can lead to audit failures and potential penalties from the IRS.
- Employee Eligibility Mismanagement: The complexity of tracking employee eligibility often leads to compliance failures. Companies that fail to ensure eligible employees are correctly enrolled risk fines and legal challenges. Questions around full-time or part-time employment status, hours worked, and eligibility thresholds are frequently overlooked, potentially resulting in costly corrections.
- Failure to Disclose Fees and Investment Costs: ERISA requires full transparency on plan fees, including 401(k) administration, bookkeeping, and investment costs, yet companies often struggle to disclose these costs. When employees are overcharged and unaware of excessive fees, it opens the door to litigation. Gone are the days when employees had limited knowledge of their retirement plan fees. Now, with more employees becoming educated on such fees, transparency is essential to avoid legal repercussions and ensure fair treatment. When conducted by an independent legal fiduciary, this analysis not only identifies typical fees mentioned above, but also identifies red flags, such as overpriced, underperforming funds offered to plan participants.
- Unmanaged Plan Structures for Specialized Employee Groups: Cash Balance Plans or other plans for highly compensated employees require additional compliance testing to ensure fairness. Failing to meet these requirements can result in significant financial penalties and even lawsuits if lower-paid employees are unfairly disadvantaged.
Technology’s Role in Modernizing Retirement Plans
Technology’s deflationary nature empowers companies to do more while simultaneously lowering their expenses. As the financial services industry undergoes a technological transformation, retirement plan administrators have new tools to drive efficiency and reduce costs. Over the past three years, technological advances have lowered the fees associated with mutual funds, ETFs, and plan administration. Despite these innovations, many companies continue to pay outdated rates simply because they aren’t benchmarking their plans to market standards.
Incorporating technology into plan administration can streamline regulatory compliance, automate reporting, and enable real-time fee monitoring. These systems can help companies identify discrepancies and take immediate action to reduce costs and increase plan efficiency to avoid costly missteps.
Many organizations are unaware of the cost-saving options associated with new, readily available technology platforms because they haven’t conducted a benchmarking analysis in recent years.
Benchmarking as a Proactive Step for Fiduciary Compliance
Benchmarking is not only a recommended practice for ensuring fees are in line with an evolving market; it’s also essential for meeting fiduciary responsibilities. Conducting annual third-party benchmarking also enables HR professionals, CFOs, and other financial executives to align with their overall governance objectives of fiscal responsibility and accountability.
While publicly available surveys exist, employers cannot conduct a true benchmarking analysis themselves. The level of granularity required—evaluating service provider fees, investment costs, and administrative structures—demands independent expertise to ensure an objective and comprehensive review. For the analysis to be free of conflicts of interest, plan sponsors must engage an independent third-party firm to conduct the review. A benchmarking audit can typically be completed in less than a week, depending on the availability of Form 5500 data and the firm conducting the analysis. Working with an external provider allows companies to identify cost inefficiencies, renegotiate fees, or explore alternative providers without bias, ultimately safeguarding both the plan sponsor and participants from excessive fees and compliance risks.
However, benchmarking is only effective if plan sponsors act on the insights it provides. If an audit reveals that similar or superior plan offerings are available at a lower cost and the sponsor fails to act, they expose themselves to potential legal scrutiny and reputational damage. Ignoring these findings can make an organization appear negligent in its fiduciary duties.
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