Annual 401(k) benchmarking audits: The best way for plan sponsors to avoid overpaying fees

According to a recent analysis of 50,000 listed employer retirement plans in Texas by Abernathy Daley, an estimated 80% of plan sponsors are overpaying for their plans due to not conducting benchmarking analyses in at least three years, signaling that widespread, avoidable overpayments on plans have become the norm for large employers across the U.S.

In fact, overpaying on the fees charged for the investments available to employees in their corporate retirement plans creates an avoidable risk for corporate plan sponsors as it is a direct violation of their fiduciary responsibility and could become the source of a legal assault.

This is a major oversight that can lead to outdated plans and high-cost investments, which delay retirement for workers and present legal risks for companies by violating fiduciary responsibilities. However, the reality is that many employers may not be fully aware of the steps they could take to better protect their business and their employees.

We talked to Steven Abernathy (pictured, left), Principal and Chairman of Abernathy Daley 401K Consultants, to discuss this fiduciary failure that has resulted from a lack of benchmarking plans, and, more importantly, how employers, especially HR, can utilize benchmarking audits to avoid legal risks, lower costs, and improve their employee’s long-term financial health.

Q: What are benchmarking audits of retirement plans?

A: Benchmarking audits are independent assessments of corporate retirement plans, such as 401(k) and 403(b) plans. These audits compare the fees, administrative services, and investment offerings of a company’s plan to industry standards. The goal is to ensure that the plan is competitively priced, adheres to best practices, and aligns with fiduciary responsibilities. By conducting these audits, employers can identify areas where they might be overpaying for plan administration or investment options and where they could improve the plan to better serve their employees.

Q:  How often should benchmarking audits be conducted?

A: Benchmarking audits should ideally be conducted annually. This ensures that employers keep up with ongoing changes in the financial services industry, including advancements in technology that reduce costs and increase efficiency. By performing audits regularly, employers can quickly address any discrepancies or inefficiencies, keeping their retirement plans aligned with fiduciary duties and avoiding potential legal risks.

Q: How are firms violating their fiduciary duties by not conducting audits?

A: Firms that fail to conduct regular benchmarking audits may be in violation of their fiduciary responsibilities by overpaying for plan administration fees and investment offerings. Fiduciary duty requires plan sponsors to act in the best interest of their employees, which includes minimizing unnecessary costs. Without audits, firms may inadvertently offer overpriced investment options or incur excessive administrative fees, both of which can negatively affect employees’ retirement savings and expose employers to legal risks due to non-compliance with fiduciary standards​.

Q:  What is behind the trend in decreasing benchmarking audits?

A: Several factors contribute to the decline in benchmarking audits. Many HR departments are overburdened with other responsibilities and may lack the resources to stay current with rapidly changing financial services and regulatory requirements. Additionally, some employers may be unaware of the cost reductions available through new technologies, or they may incorrectly assume their plans are already competitively priced. Without regular third-party audits, these cost-saving opportunities and compliance gaps remain hidden​.

Q:  How does lack of these audits affect employees’ retirement plans?

A: When companies don’t perform benchmarking audits, their employees may be subjected to higher fees and fewer competitive investment options. Over time, these excessive costs reduce the returns on employees’ retirement savings, delaying their ability to retire comfortably. Employees may also be unaware that they are paying more than necessary for the administration of their retirement plans or for investment options that could be available at lower costs​.

Q: Why are so many employers not aware of the steps to take to protect their business and their employees?

A: Similar as to what’s behind the trend in decreasing benchmarking audits, the complexity of retirement plan administration and the constant evolution of regulatory requirements make it difficult for employers to stay informed. Many employers, especially those with smaller HR departments, may lack the resources to navigate these challenges. Additionally, without the right support, employers may not realize the importance of benchmarking, or the risks associated with failing to conduct these audits. This lack of awareness may ultimately affect their ability to offer competitive retirement plans​.

Related: New SECURE 2.0 regulations now in effect in 2024: Is your 401(k) in compliance

Q: With 80% of plan sponsors in Texas overpaying for their plans for not conducting audits, do you expect the same outcome in the rest of the country?

A: Absolutely. Abernathy Daley’s findings suggest that this issue is not unique to Texas. Nationwide, we believe over 80% of corporate plan sponsors have likely not conducted benchmarking audits in the past three years. Given that advancements in technology have reduced the cost of plan administration and investment fees, companies across the country are likely overpaying for their retirement plans unless they are regularly benchmarking to stay competitive. If our findings are correct, this overpayment trend could become a widespread fiduciary failure that impacts employees’ long-term financial security​.