Let the Sunshine In! Benchmarking Brings Clarity to Retirement Plans

What gets measured gets managed. What gets managed…gets better.That’s been our experience when working with US defined contribution (DC) plan sponsors. The exercise of benchmarking a DC plan against other, similar-sized plans has prompted improvement on many fronts.

This is especially helpful for plans that may not have the kind of extensive, dedicated in-house retirement benefits staff that many of the largest DC plans have. Frequently, other plans rely on company executives who have to wear many hats—oftentimes it’s the CEO doing the heavy lifting. In many cases, the advice and assistance of financial advisors or consultants (collectively referred to here as “advisors”) become instrumental.

Benchmarking helps plan sponsors stay on top of the evolving needs of their participants as well as the evolving capabilities of the retirement services industry. It also bolsters a plan sponsor’s standing as a responsible fiduciary—as do investment policy statements or other documents that detail a DC plan’s mission and progress toward stated goals.

But it’s the details of benchmarking that make the difference.

It’s Not Just About Fees

When we start the benchmarking discussion with plan sponsors, they often think it will be a great way to get a handle on fees. That’s certainly important, but good benchmarking is much more. It’s a pragmatic strategy for assessing all the major components of a plan—fees, investments, communications, recordkeeper services, fiduciary issues, plan participation levels and other plan goals.

The key to good benchmarking starts with a large enough database to make sound comparisons across a wide range of plan sizes. We conduct surveys with over 1,000 plan sponsors with responsibility for plans ranging in size from less than $1 million in assets to more than $500 million. And we ensure that there’s adequate representation at all levels, because different-size plans often have different issues and priorities.

For example, we asked survey respondents about which issues worried them the most. The overall top response was that participants don’t know how much they need to save in the plan to meet retirement needs. But more sponsors of the largest plans (with $250 million or more in assets) chose this answer than sponsors of smaller plans (with $10 million or less in assets). On the other hand, fees weighed more heavily on sponsors of smaller plans than on those with more than $10 million in assets.

Benchmarking often brings issues into the open, where the “why” and the “how to improve it” can be fully explored. It provides context to identify top plan priorities—especially if they weren’t recognized previously as top priorities. Benchmarking helps plan sponsors take a step toward targeted actions that can meaningfully improve the plan and help them fulfill their fiduciary obligations.

Investment Menu: Free to Choose or Free to Fail?

Benchmarking can prompt deeper discussions on many topics between plan sponsors and their advisors. Nearly 80% of plans with $50 million or less in assets use an advisor, and the most valued aspect of that relationship is the quality investment advice plan sponsors receive.

While much of that advice may be concentrated on the selection of investment options, benchmarking can help plan sponsors determine and identify whether they have too many or too few options, and whether the plan’s “freedom of choice” is actually helping or hindering the retirement outcomes of participants.

In our surveys, nearly 60% of plan sponsors feel they offer the right number of investment options in their plans. Another 24% feel their plans need more. But what is that “right” number?

About one-third of plan sponsors feel that five to 10 options is the right amount, and another one-third say 11 to 15. But some plans have fewer and others have 20 or more. When advisors conduct a benchmarking comparison, plan sponsors may alter some preconceived notions and put their DC plans on a better track for the future. These discussions also help plan sponsors weigh the merits of adding such features as automatic enrollment and automatic escalation, selecting a qualified default investment alternative and improving their plan’s communications.

Getting Started

Plan sponsors should talk to their advisors about conducting a benchmarking exercise. If you don’t have an advisor for your DC plan, this might be an excellent opportunity to consult a retirement advisor. Advisors not only help map out the areas to assess and the way to gauge your plan’s progress; the advisor also acts as a sounding board concerning how you’re doing vis-à-vis other sponsors, as well as how your plan is doing in creating better outcomes for plan participants.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AllianceBernstein portfolio managers.

Biography

Craig Lombardi
Managing Director—Defined Contribution

Craig Lombardi is Managing Director of Defined Contribution investments, responsible for retirement sales through intermediaries, platforms and consultants representing sales in the under $1 billion market. Previously, he spent 20 years at Fidelity Investments, serving most recently as senior vice president and national sales manager for the institutional insurance division of Fidelity Investments Institutional Services. Lombardi began his career with Fidelity Investments Retirement Services Company, where he was responsible for servicing defined contribution plans of the major Fortune 100 companies. He joined the insurance division of Fidelity Investments institutional sales as a marketing director in 1992. From 1993 to 2002, Lombardi’s responsibilities included wholesale distribution of Fidelity VIP funds through various insurance companies’ variable annuity, variable life and group pension contracts. From 2002 to 2006, he acted as the eastern divisional sales manager for Fidelity’s institutional insurance group, managing nine wholesalers. Lombardi holds a BA in history from the College of Wooster. He is a former member of the Rhode Island Make-A-Wish Foundation and Johns Hopkins Oncology Center board. Location: New York

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