Retirement planning is a key pillar of the American Dream. It’s the promise of a life well-lived after a career of hard work and dedication. The dream of a comfortable and fulfilling retirement, free from financial worries. Achieving this dream often requires careful planning and proactive steps. As life expectancy increases and traditional retirement models evolve, prioritizing a quality 401(k) is a must. Unfortunately, some employers and employees often treat retirement plans as afterthoughts. But why?
Many employers still offer outdated 401(k) plans that could delay an employee’s retirement, leading to workforce stagnation and even opening companies up to legal risks. This stems partly from employees not being fully aware of their complete employer-offered 401(k) offerings or the knowledge that they exist. According to the Department of Labor, while 68% of private workers had access to employer-sponsored 401(k) plans in 2021, only 51% of the workforce contributed to such plans.
At the heart of this issue is the trend of decreasing benchmarking audits, a practice that once served as a critical check to ensure employers are upholding their fiduciary responsibilities. Without these regular evaluations, companies could pay for costly subpar plans and fall short in supporting their employees.
What Are Benchmarking Audits and Why Do They Matter?
Benchmarking audits are independent assessments of retirement plans that compare the fees, services, and investment offerings of a company’s 401(k) or 403(b) plan to industry standards. Regular benchmarking helps ensure a plan is competitively priced, aligns with best practices, and fulfills the fiduciary responsibilities set by the Employee Retirement Income Security Act (ERISA).
Yet, despite the clear benefits of benchmarking, many employers neglect to conduct these audits. This oversight leaves employers overpaying for plans and investments, impacting the bottom line and, most importantly, their employees’ financial future. Failure to benchmark is also a breach of fiduciary duty. Companies have a legal obligation to act in the best interest of their employees, including minimizing unnecessary costs and offering investment options that maximize retirement savings. Companies risk violating these duties without regular audits, opening the door to legal challenges and financial penalties.
Businesses that don’t undergo annual auditing also fail to see the strategic value of a well-maintained 401(k) materialize. That means missing out on an opportunity to boost talent acquisition, retention, and financial security for their workforce. Yesterday’s young employees may have been fine settling for office perks like free food and fun office activities, but today’s employees have matured in what they expect from employers. They want meaningful benefits focusing on their health and wellness and a reliable 401(k) plan to secure their financial future.
By regularly benchmarking and optimizing 401(k) plans, companies can offer more competitive investment options and lower fees, helping to attract and retain top talent. A well-managed retirement plan signals that a company cares about its employees’ long-term financial wellness and directly contributes to better workforce engagement and productivity.
The Consequences of Skipping Audits
One of the most concerning outcomes of skipping regular benchmarking audits is the exposure to legal risks. Under ERISA, employers are considered fiduciaries and must act in the best interest of their plan participants—employees. The Department of Labor mandates that plan sponsors carefully review and compare investment fees to ensure they are fair and reasonable. Regular benchmarking is a crucial tool for meeting this requirement. If a plan’s fees are too high or its investments underperform, employees’ retirement savings are impacted, potentially delaying their ability to retire comfortably.
For employees, high-cost investments and excessive administrative fees erode the returns on their retirement savings, making it harder for them to build the financial cushion needed for retirement. Fortunately, recent financial services and technological advancements have made it easier to manage retirement plans effectively. Yet, many companies continue to rely on outdated plans with excessive fees simply because they aren’t conducting the necessary audits.
The Growing Burden on HR
A leading factor in the decline of benchmarking audits is the growing list of responsibilities placed on HR departments. Managing employee benefits, including retirement plans, is one of the many tasks that fall under HR’s domain. As compliance requirements grow more complex and HR teams remain understaffed, it’s easy to see why audits might be neglected.
HR teams often lack the necessary resources to manage retirement plans effectively and efficiently, let alone perform detailed benchmarking audits. However, the stakes for HR professionals couldn’t be higher. When HR teams fail to conduct regular audits, they risk offering subpar retirement plans that hurt the company’s bottom line and damage its reputation as an employer of choice. This is where outside advisors and third-party audits can make a tangible difference, ensuring that the company’s 401(k) plan remains competitive, compliant, and cost-effective.
Transforming 401(k) Plans into Strategic Tools
Leveraging third-party expertise is crucial for maximizing the value of a 401(k) plan. Regularly auditing and benchmarking a plan’s compliance, investment performance, and administrative efficiency ensures it’s operating optimally. Additionally, carefully analyzing all fees associated with the plan and negotiating with providers can help reduce costs.
Unbundling services and staying informed about industry trends and best practices can enhance its performance. By proactively utilizing third-party advisors and conducting regular audits, employers can significantly improve the 401(k) plan’s effectiveness and ensure it meets their employees’ needs.
When done annually, benchmarking audits ensure that companies can deliver on these expectations. By keeping fees low and making sure employees have access to the best possible investment options, businesses create an environment where financial wellness is prioritized, boosting overall morale and loyalty.
Educating Employees: Financial Literacy for a Secure Future
Armed with the right tools and support to guarantee employees receive quality retirement benefits, HR teams can now focus on accurately spreading the word about the offerings to employees. The best way to begin this process is by focusing on four key tactics:
- Education: To help employees make informed financial decisions, offer educational materials and workshops on how low fees can impact long-term savings. Employees can access personalized advice from knowledgeable financial advisors during one-on-one consultations.
- Highlight Unique Features: Emphasize retirement plan features such as low-cost index funds and financial wellness programs. To ensure employees fully understand these benefits, organize group meetings with retirement plan experts and investment advisors to provide targeted education.
- Transparency: A firm commitment to employee transparency is always the best approach. Regarding retirement planning, don’t be afraid to clearly explain how the plan compares to industry standards.
- Regular Updates: Keep employees informed by regularly communicating any improvements or changes to the plan resulting from the company’s monitoring efforts.
With these strategies in mind, the message is clear: failing to conduct regular benchmarking audits of 401(k) plans is not just a missed opportunity for savings—it’s a breach of fiduciary duty that can have far-reaching consequences. Employers who neglect this responsibility risk legal action, but more importantly, they fail their employees by offering outdated, high-cost retirement plans that delay financial security.
By strategically investing in 401(k) plans, companies can create a powerful competitive advantage. These plans attract and retain top talent and also foster employee loyalty and satisfaction. Regular benchmarking audits ensure that these plans remain aligned with industry standards and employee needs, driving financial and reputational benefits for the company and helping calm the future financial stress of many employees.
Post Views: 280
