Abstract: Abernathy Daley 401k Consultants (“Abernathy Daley”) believes well over 80% of all corporate retirement plans have not been benchmarked by independent 3rd parties over the last 3+ years. Consequently, more than 80% of corporate plan sponsors are overpaying on plan administration, and their employees are overpaying for the investment alternatives available within the corporate retirement plan. This assumption includes both 401(k) plans and 403(b) plans.
Introduction:
Human resources (HR) departments are often tasked with understanding the corporate responsibility of offering employees a strong retirement plan while simultaneously keeping up with increasingly frequent and complex regulatory changes. It’s clear that HR professionals are stretching beyond their traditional role as they manage increasingly sophisticated benefit offerings. These offerings, including retirement plans, often feature complex financial, legal, and compliance demands. If overlooked, the result can have severe consequences. Further, the consistent, innovative nature of financial services and its ever-changing regulatory requirements will only continue to challenge HR departments nationwide.
An Easy Strategy
Implementing an annual benchmarking plan audit conducted by an independent third party acting as a legal fiduciary is an often neglected yet crucial first step for HR professionals overseeing their organization’s retirement plan. A yearly benchmarking analysis highlights the plan’s components, identifies overpriced and poor-performing investments for employees, and whether regulatory adherence is up to date.
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 with industry standards ensuring the plan is competitively priced, adhering to best practices, and aligning with regulatory and fiduciary responsibilities. Benchmarking clearly shows where plans are offering excellent investment options and where plans are offering overpriced options. They also detail regulatory requirements and innovations, allowing HR to make changes and document the process of evaluating the employee retirement plan.
In short, benchmarking enables every HR department to identify improvements which can be made and how to make those improvements. It allows plan sponsors to make changes when needed and to document their vigilance when improving their plan. The investment in benchmarking can alleviate key regulatory, financial, and fiduciary concerns, transforming corporate retirement plan offerings from a basic requirement into a potentially powerful recruitment and retention tool.
The Abernathy Daley Formula: How we estimate the percentage of plans that have not been benchmarked over the past 3 or more years:
Technology is deflationary
Innovative technology enables companies to do more while simultaneously lowering costs and increasing productivity. Over the past 3-5 years, we’ve seen significant advances in the financial services industry based on technological improvements, which lower costs, streamline operational efficiency, and increase productivity.
Technological advancements in retirement plan administration have significantly reduced costs for both plan sponsors and employees. Automation and Artificial Intelligence has streamlined support services for corporate 401(k) and 403(b) plans, cutting administrative expenses. Similarly, the costs of managing diversified mutual funds and ETFs have dropped dramatically, with many funds now offering significantly lower fees compared to three years ago. These reductions have translated into substantial cost savings: plan sponsors benefit from lower administrative costs while employees enjoy reduced fees on investment offerings.
Overall, the costs to administer a 401(k) plan have decreased by at least 25%, and investments with comparable returns are now widely available at a fraction of their previous cost. Unfortunately, only a small minority of corporate plan sponsors have taken advantage of these lower costs offered by new technology and annual benchmarking. Why?
Thesis:
Abernathy-Daley 401k Consultants believe the vast majority of corporate plan sponsors have not had their 401(k)/403(b) plans benchmarked by an independent 3rd party over the last three or more years. Consequently, the majority of corporate plan sponsors are paying more than they should for a) the administrative fees associated with their retirement plan and b) the fees charged* for the investments available to their employees in their corporate retirement plans.
*Overcharging employees for investments available in the 401(k) plan creates an avoidable risk and is a direct violation of a Plan Sponsor’s Fiduciary responsibility. If a Plan Sponsor violates their Fiduciary responsibility the violation could become the source of a legal charge.
Our reasoning:
A) Most corporations are run by intelligent management teams and are overseen by intelligent boards.
B) Most corporations are rational actors. Meaning - most corporations will make decisions that maximize their benefits and minimize their costs.
C) If businesses can build or buy a product or produce a service at a lower cost than their competition, it creates an advantage and/or it increases profits.
D) If corporations don’t constantly work to produce and deliver their products and services at the lowest costs, their competition will. If they don’t constantly innovate to remain competitive, revenues and profits will shrink, and they will lose clients.
E) If a corporation knows an advantage exists, and can realize the advantage, they will implement that advantage and improve profits.
We believe it is likely that over 80% of the 401(k) plans in the U.S. have not been benchmarked over the last 3+ years
Methodology:
Our proprietary database for Texas, one of the largest and fastest growing states in the United States, has 46,829 retirement plans listed. We used Texas[i] as a bellwether for the rest of the U.S. as Texas has a higher-than-average percentage of large companies (designated as having over 100 employees); large companies tend to have more well-developed corporate structures; thus, Texas is likely to have a more well developed corporate infrastructure than most states[ii].
Of those 46,829 plans, we believe over 80% (40,272) are overpaying for their retirement plan administration and investment offerings[iii].
To formulate this estimate, we broke the retirement fund classification into two groups:
1. Corporate retirement plans with over 100 employees (“large companies”)
2. Corporate retirement plans with less than 100 employees (“small companies”)
We bifurcated the retirement fund category for two reasons:
- Firstly, because all plans with over 100 employees/plan participants must legally file a Form 5500 with accurate data describing the 401(k) plan. Without the accurate yearly data from Form 5500, we could not reach intelligent conclusions about plan size, plan expenses, plan participants, etc.
- Secondly, our professional experience leads us to believe that companies with over 100 employees tend to have greater resources available for their employees than companies with less than 100 employees[iv]. Thus, they are more likely to have HR staff and remain up to date with regulatory changes and current product offerings.
The Data on Administrative Overpayments
Larger companies: Our database tells us that 5,241 (79.8%) of all large company retirement plans and 36,236 (90%) of smaller company plans are overpaying for the most basic administrative services, which are easily obtained from any of the top 10 providers[v]. The combination of 79% of large companies and 90% of smaller companies leads us to believe that over 88% of all companies in Texas have not had a benchmarking analysis in more than three years.
Our first assumption is that corporations are intelligent and profit-seeking. In order to remain competitive, they want to offer the best products and services at the lowest cost. If over 79% of the large companies in our database are overpaying for a basic service like retirement plan administration, they must not know those services are available at a significantly lower cost. Since a benchmarking analysis clearly details the cost of readily available administrative offerings, they must not have had a benchmarking analysis. Thus, we believe they don’t know they are overpaying and have not had a benchmarking analysis.
Smaller companies: Our database tells us that a much higher percentage of smaller companies are overpaying for those administrative services, hence our belief that 90% or more of the smaller companies are not aware that lower-cost administration and lower-cost investment alternatives are widely available.
That said, there are always outliers for any analysis; meaning there may be valid reasons a company might choose to overpay for a basic service. Our assumption is that 5%-10% of those 5,241 large companies and 5-10% of those 36,236 smaller companies are voluntarily overpaying and may have a reason for it. We, therefore, estimate that 95% of corporate plan sponsors would have replaced excessively priced funds with funds that were reasonably priced and less expensive had the benchmarking analysis been performed.
Non-Administrative Retirement Plan Offerings Affecting Employees
What about the other non-administrative services associated with the retirement plan offerings?
Of the 1,325 large company retirement plans and the 4,026 small company retirement plans that had competitive administrative costs, our research shows that in reviewing existing plans, over 80% offer a selection of funds available to plan participants with excessive fees and additional costs that could easily be corrected by replacing the higher-cost investments with lower cost investments offering similar or superior returns.
Reason: Offering competitively priced investment alternatives for employees who are plan participants is primary fiduciary duty #1 and legal responsibility for all plan sponsors interested in avoiding a punitive lawsuit.
If this reasoning is correct, it increases the likelihood that a significantly large number of the plans are unaware they have a meaningful number of overpriced funds available in their 401(k) plan. Offering highly priced or unreasonably priced investment alternatives is one of the primary justifications for legal prosecution against corporate America’s Plan Sponsors. Overpriced Investment offerings can be easily detected and corrected by an independent benchmarking analysis.
Summary
The vast majority of companies offering retirement plans in the U.S. are overpaying for the services and costs available for their retirement plans. Technology has lessened costs and can reduce the time and effort a company’s HR department spends administering the 401(k) plan. It can also significantly reduce the time HR devotes to retirement plan regulation and administration while also reducing the fiduciary responsibilities of the corporate sponsor. For example, we estimate companies with more than 1000 employees can save 150 hours – or more – per year by implementing up-to-date technology and working with a competent, independent administrator and record keeper.
Abernathy Daley believes every company in the U.S. should embrace the time and expense to have their corporate retirement plan benchmarked annually. A benchmarking analysis[vi] will clearly document where the corporate retirement plans can reduce the Plan Sponsor’s administrative costs. It will also clearly show the Plan Sponsor if - and where - investment choices for employees can be improved with lower fees, and potentially higher returns.
[i] We believe this state (Texas) is emblematic of the U.S. in general, and because it is one of the fastest growing and most populated states in the U.S., if our reasoning is flawed, we believe it is conservatively flawed.
[ii] We postulate that a larger company is, in general, more sophisticated, and has a more well-financed corporate infrastructure. This likely gives larger companies the ability to incur the slightly higher costs of rigorous testing each year thus providing a higher probability of implementing regulatory demands. All else equal, we believe larger companies with over 100 employees are more likely to devote resources to rigorous 401(k) plan governance.
[iii] 46,829 Texas Corporations filed a form 5500 in 2022, indicating the administration of a retirement plan.
6,566 indicated more than 100 employees. 5,241 of those companies (79.8%) had a rating indicating their corporate administrative costs were greater than current administrative costs widely available as of July 7, 2024.
40,263 Texas Corporations in Texas had less than 100 employees (86%). We estimate 36,236 companies with less than 100 employees (90%) have not had benchmarking analysis over the last 3 or more years.
Summary:
Total companies with greater than 100 employees – without a benchmarking analysis in the last 3 years - we estimate 5,241.
Total companies with less than 100 employees – without a benchmarking analysis in the last 3 years – we estimate 36,236.
Total companies in Texas without a benchmarking analysis in the last 3 years – we estimate - 5241+36,236 = 41,477.
Total companies with retirement plans in Texas 46,829.
Total Texas companies/total companies without benchmarking analysis = 46,829/41,477 = 88.57%. We subtract 10% for estimation errors.
This leads us to estimate that approximately 80% of all companies in Texas are overpaying for their retirement plans administration and investment costs. *This calculation does not include those plans with investment options charging fees which can be obtained at a fraction of current costs for statistically similar investment results. An independent benchmarking analysis clearly documents investment alternatives which could provide plan participants/employees with similar results at lower costs.
[iv] Companies with over 100 employees tend to generate more revenue and more profit than those companies with fewer than 100 employees, thus are more likely to bear the costs of regulatory adoption and yearly benchmarking analysis. Those companies with fewer resources are less likely to spend their revenue on operations that are not directly related to the corporate initiative aimed at creating profitable products and services. Therefore, we surmise that those companies with less than 100 employees are even less likely to incur the cost of a benchmarking analysis than those with over 100 employees.
[v] 46,829 plans filed Form 5500. 6,566 have > 100 employees. Of those 6,566, our database gives a rating which documents that 5,241 have costs for retirement fund administration which clearly exceeds the standard costs available today from any of the 10 top vendors.
[vi] Abernathy Daley 401k Consultants is not a benchmarking analysis firm. All benchmarking analysis efforts should be performed with independent third parties and without bias in any way. Additionally, while Abernathy Daley can recommend an independent 3rd party to perform a benchmarking analysis, Abernathy Daley 401k Consultants has no incentive to recommend any of the third parties offering a benchmarking analysis, in any way. Abernathy Daley 401k Consultants seek to lower the costs associated with retirement plan administration and investment alternatives, reduce the hours HR spends on retirement plan activity, and deliver personalized employee education. Their goal is to turn the retirement plan into a benefit for employees rather than just a cost center.
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