For many employers, managing a 401(k) plan has become another administrative task. Yet, as businesses seek to attract and retain top talent, the 401(k) plan holds untapped potential as a strategic tool for long-term workforce engagement and financial well-being. Unfortunately, employers are conducting fewer benchmarking audits of their retirement plans.
Companies need these audits to avoid violating their fiduciary duties under the Employee Retirement Income Security Act (ERISA). At the same time, employees are left with outdated and costly plans that undermine their financial security. This failure to conduct regular plan audits is an expensive oversight for businesses, potentially both legally and financially. But more importantly, it’s a missed opportunity to transform the 401(k) from a burden into a powerful asset.
The Importance of Benchmarking Audits
A benchmarking audit is an independent evaluation that compares a company’s 401(k) plan to industry standards regarding fees, investment options and structure. These audits ensure the plan is competitively priced and complies with fiduciary standards, protecting the employer and employees.
In recent years, however, the frequency of these audits has declined. This is typically due to the following factors:
- Complexity: Benchmarking audits can be complex and time-consuming, often requiring specialized knowledge from outside expertise. This may deter smaller businesses or those with limited resources.
- Costs: Audits can be expensive, and businesses may be reluctant to incur these costs, especially if they believe their plan is performing well.
- Lack of Awareness: Some businesses may be unaware of the importance of benchmarking audits or the potential risks of not conducting them.
- Misconceptions: There may be misconceptions about the audit process, such as the belief that it is only necessary for more extensive plans or is needed only once.
This lapse exposes companies to potential legal action and diminishes their ability to offer employees a competitive, cost-effective retirement plan. Failing to conduct a benchmarking audit can result in excessive fees, underperforming investment options and a workforce unprepared for retirement. For employees, the consequences are particularly stark — high-cost plans erode retirement savings, delaying employees’ ability to retire.
Many employees of varying demographics may not be aware of or see the value in investing in their retirement funds. In a recent survey, 4 out of 10 employee respondents said they don’t contribute any money to their 401(k) plan.
Low-income and young employees, in particular, may struggle to contribute to 401(k) plans due to essential living expenses, limited financial knowledge, and a short-term focus influenced by the complexity of savings and the allure of immediate gratification. This is why promoting the plan benefits is essential for employers, so they invest in team members while adhering to their fiduciary responsibilities. Under ERISA and the Department of Labor, employers are legally required to act in the best interest of their employees when managing retirement plans.
The Role of Third-Party Advisors
One reason for the decline in benchmarking audits is the growing complexity of retirement plan management and the increasing strain placed on HR departments. Many HR teams are stretched thin, balancing compliance, benefits and employee relations, leaving little time for the detailed analysis required to effectively audit 401(k) plans. This is where third-party advisors can make a critical difference.
Companies can ensure that their retirement plans remain competitive, compliant and cost-effective by engaging independent advisors to conduct annual benchmarking audits. These audits relieve the burden on HR teams, allowing them to focus on strategic initiatives while ensuring the company’s retirement plan supports long-term employee retention.
A Call to Action for Business Leaders
Business leaders can impact their employees’ long-term financial security by investing in employee education and providing the necessary tools. By allocating the budget for educational materials, workshops and access to fiduciary plan advisors, employees will have the resources needed to make informed decisions about their retirement savings. Additionally, it’s essential to make these resources easily accessible to all employees, regardless of their role or level of experience.
Then, there’s the focus on adequately communicating the value of a retirement plan. By highlighting the long-term financial security a well-funded retirement plan can provide, leaders can motivate employees to participate and contribute regularly. Sharing real-life examples of employees who have achieved their retirement goals through the company’s strategy can inspire and encourage others.
Finally, business leaders should regularly review and improve their retirement plans. By monitoring the plan’s effectiveness and making necessary adjustments, employers can ensure it continues to meet employees’ needs. By committing to regular benchmarking, companies can lower costs, improve employee financial wellness and enhance their appeal to top talent.
Steven Abernathy is a famed financial consultant, CEO of Abernathy Daley 401k Consultants, and the principal and chairman of the board at The Abernathy Group II Family Office. He previously held executive roles at Shearson American Express and Cowen & Co. Abernathy earned a Bachelor of Science as a pre-med student from Fordham University.
