By Heather Ross, with Jennifer Kelly

DC Edge spoke with Henry Yoshida, Mike Maresh and Bruce Lanser about how they use benchmarking to attract new clients, strengthen existing ones and keep their practices competitive.

Now, more than ever, plan fiduciaries are looking for help in building more effective retirement plans. Having the ability to benchmark and evaluate the effectiveness of a plan, and offer suggestions on how to enhance it, reinforces a retirement plan advisor's value.

Austin-based ERISA consultancy Maresh Yoshida 401k Group has made benchmarking an integral part of its business and its value proposition to prospects and clients. "Benchmarking is part of our fiduciary management process," says Mike Maresh, a managing partner and co-founder of the hybrid RIA , which has emerged as a leader in the marketplace. "We regularly benchmark our clients' plans, using an independent source, just to hold ourselves accountable."

Henry Yoshida agrees with his partner. "We believe that plan sponsors have the right, and consultants have an obligation, to make sure that plans are managed in a reasonable way from a fee and service perspective. We can't take for granted our position in the industry and just sit back and wait. Things change."

While Maresh and Yoshida have been benchmarking clients for years, Bruce Lanser, a Graystone Consultant with Morgan Stanley Smith Barney who has focused on the retirement plan business since 1986, began providing benchmarking services late last fall. "Part of our value proposition is to shield our clients from fiduciary liability," he says. "If all we're looking at is investment performance, then there's a whole area we're not addressing unless we benchmark the fees and services that they're getting." Lanser,Maresh and Yoshida agree that plan sponsors can benefit through potentially reduced fees, improved plan design and enhanced ability to meet new 408(b)(2) requirements going into effect in April 2012*. But they also believe that benchmarking helps them showcase their value, attract new business, solidify relationships with existing clients and protect their book of business from competitors.

More Than Just Fees

Benchmarking creates a standard for plan sponsors and service providers to follow by comparing plan structure, investments and costs against other similar plans of similar sizes. It helps serve as the window into an optimal 401(k) plan, to assist retirement plan advisors and plan sponsors to gauge the plan's efficiency, determine the reasonableness of plan fees against peers and identify what can be done to make any fixes, as needed.

Yoshida explains that the first step is making sure that plan sponsors understand what benchmarking entails and what kind of information it can provide. Often, he says, the focus is on fees, but sponsors do not grasp the difference between fee analysis and benchmarking. "Fee analysis just shows you what your plan pays in fees, but it doesn't compare it to plans of a similar size in a similar industry," says Yoshida. "Sponsors then need both." Maresh agrees. "They need to look at the components of those fees and be able to break out the funds' investment management fees, revenue generated from the funds and the plan's administrative fees."

"I've had meetings with several plan sponsors where the overall level of fees was fine, but one or more components were higher than average," says Lanser. "For example, I saw plans whose recordkeeping costs were at 35 basis points, versus a peer average of 25. Their investment management costs were low, so the aggregate fee was acceptable, but the components were out of whack." Beyond fees, benchmarking impacts plan design as well. A sophisticated analysis can help plan sponsors determine whether their match is competitive or whether they should consider newer features like auto-enrollment or autoescalation of deferrals. It can even compare the ultimate success of their plan—in terms of participant savings and deferral rates—to that of their peer group.

Tom Kmak, CEO and co-founder of Fiduciary Benchmarks, a leading benchmarking service, agrees. "It's not simply a matter of fees. There can be significant differences in the level of support, service and success achieved among providers, as well as in the benefits they ultimately deliver to participants." To Kmak, benchmarking can help plan sponsors understand the value they are receiving. Smart retirement plan advisors can use benchmarking to show how their fees add value to the plan, based on the level of service they're providing.

1. Prospect New Clients

Henry Yoshida says that his firm prospects plan sponsors primarily through seminars on plan design. After the initial contact, his firm may perform benchmarking analysis as due diligence prior to meeting with a potential client. "It helps us on the front end to determine where we might be able to add value and help the organization." Like Lanser, they offer it as part of an overall package, not a stand-alone service. Yoshida continues, "We can often compete for and acquire a piece of business because we effectively demonstrate the benefits of benchmarking." The value the retirement plan advisor adds to the benchmarking analysis can make the difference.

Since starting in November 2010, Lanser has run reports for roughly 15 prospective clients. Four asked for proposals, and one signed on as a client. Before a finals presentation last March, he was told that he ranked fourth out of four presenters. "One of the final questions they asked was about how we're going to help them track fees," he says. "I showed them a couple of the pages from a sample benchmarking report. The CFO saw it and said, 'This is awesome,' and we ended up getting hired."

2. Retain Existing Clients

Benchmarking can work to strengthen existing client relationships as well, ensuring sponsors that you are doing everything you can to keep their plan in line with a changing landscape. And, in an environment where fees have been drifting steadily down, regular benchmarking—every year or two—can often save your clients money and help ensure they are meeting their fiduciary requirements.

Mike Maresh recently re-benchmarked a client that had been on his firm's book for about two years. "We looked at the fees when we took on the plan, and they were in line then," he says. "Even so, two years later, when we put out an RFP to benchmark fees in the plan services, we found that the revenue requirement for the plan had changed from 58 basis points to 31 basis points, a reduction of about $135,000 per year. In addition, we were able to reduce the weighted average fund expense ratios from 98 to 79 basis points, saving participants an additional $95,000 in internal fees."

Bruce Lanser, too, has generated value for existing clients through the benchmarking process. He recently benchmarked a plan that had been on his book for a year and a half. "The benchmarking report confirmed everything that we did for the plan, and showed that their costs were below average," said Lanser. "But through the benchmarking process, we were able to lower the wrap fees on a stable value fund in the plan by 25 basis points."

Benchmarking can also help plan sponsors make the case for design improvements. "Often we'll talk to the human resources manager, who may favor an auto-enrollment feature as a way to increase participation, but that individual will have to make the case to an investment committee, the CFO or the CEO," says Maresh. "To help them justify the change to management, we can give them the data that shows that 62% of plans in the $50M to $75M range serving professional services firms offer auto-enrollment." Lanser has used benchmarking to call attention to a participation education plan that isn't working. "The client is looking at the wrong things. They spend a lot of money, they have people travel around to locations to give great talks about investing, but they're not maximizing the match at all, which would really increase participation rates."

3. Showcase Your Value

It's important to benchmark your own fees, showing that they are in line with those of advisors and consultants with comparable business models. "Benchmarking is a very good way of showing the going rate for ERISA consulting or co-fiduciary services such as a 3(21) or a 3(38) fiduciary," says Yoshida. "Most don't know what these services cost."

Lanser says that benchmarking has, occasionally, allowed him to justify above-average fees because of above-average results. "In a plan we met with recently, analysis showed that our fees were higher than normal," he says. "However, success measures including the percentage of participants that used automatically diversified options, the number maximizing the company match, the contribution rate by the non-highly compensated and the overall participation rate was better than average, too. We were able to make the case that our fees were justified."

Questions to Ask

  • Benchmarking reports are only as good as the information they track. It's important to find out:
  • How many plans are in their sample?
  • How many years of data do they have?
  • What types of data are available?
  • How narrowly can peer groups be constructed by size, industry group and other factors?
  • Are they independent or part of a recordkeeper/investment manager with possible conflicts of interest?

What's Ahead?

Looking forward, Maresh says that he expects benchmarking measures to become more standardized, so that plans and providers can be compared easily, not just according to how much they charge, but how well they're succeeding. "We're starting to see much more emphasis on participant success measures," he says. "Participation rates, the percentage of participants maximizing the match, and the percentage taking loans or distributions—all these are measures of how well the plan is actually helping people save for retirement." Lanser agrees. "It isn't just fees. It's also looking at the whole plan design and success of the plan." The goal, they all agree, is not just information for its own sake, or even protection from lawsuits. "Benchmarking is one of the top ways to make a company's plan the best possible now, next year and into the future," says Maresh.

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