Benchmarking the features of a 401(k) plan

CPAs can help businesses make the right decisions with their retirement plans.
By Alan J. Fishman and Charles V. Creighton

Benchmarking the features of a 401(k) plan
Photo by TriggerPhoto/iStock

Whether they're serving clients in public accounting or working in business and industry, CPAs may need to provide advice on the many choices available when a business is offering a new retirement plan or assist in reviewing an existing plan.

Reviewing an existing plan represents a tremendous opportunity for practitioners to offer value-added services to their clients and for finance employees to serve their employers. Clients and businesses alike rely on CPAs to help them ensure the plan continues to meet objectives.

Business owners who sponsor plans must manage their fiduciary responsibilities, including plan management, hiring and monitoring service providers, employee education, participant communication, administrative support, and plan design. It should come as no surprise that of all the parts of a retirement plan, the biggest area to come under intense focus recently is cost.

Beginning in 2012, a Department of Labor rule required annual disclosure of total plan fees to plan sponsors and participants. The trend on fees will place additional responsibilities on plan advisers by shedding more light on plan costs and how they are assessed. Many plan sponsors and participants can usually identify the cost of each investment option, or a fund's expense ratio, by referencing the annual fee disclosures they receive. But ask plan sponsors if they know the overall "weighted" investment costs in their plans, and they may not know the answer. Unfortunately, this information is not readily available unless requested by the plan sponsor.


These questions can be used to benchmark a plan against others and to learn more about the important features of a retirement plan. Tally your points as you answer the following 10 questions.

1. Do you periodically review plan investment performance against benchmarks and guidelines? If no, give yourself 0 points. If yes, give yourself 12 points.

Adopting an investment policy statement is important, but the process of reviewing plan investment options against guidelines and benchmarks outlined in the statement is critical.

2. Does the retirement plan vendor or adviser offer different levels of fiduciary services? If it offers co-fiduciary protection, add 12 points. If it offers only a warranty, add 8 points. If it offers neither, add 0 points.

Some retirement plan vendors offer warranties at no cost that promise to restore any losses to the plan and pay litigation costs related to the suitability of the investment process and fund lineup. Some vendors offer plan sponsors co-fiduciary services at little or no cost.

These services come in different levels and are generally referred to as 3(21) and 3(38). What's the difference between these two? A 3(21) investment fiduciary provides investment recommendations to the plan sponsor. This level of service is for plan sponsors who want assistance with their fiduciary responsibilities but want to maintain discretion and control of their plan's investment menus. A 3(38) investment manager takes full responsibility for the plan's investment decisions. This level of service is for plan sponsors who lack expertise and want to shift more of the fiduciary responsibilities to a third party.

3. Did an investment adviser or retirement plan vendor provide education to participants in the past year? If no, add 0 points. If yes, add 12 points.

Education is essential if you wish to comply with Employee Retirement Income Security Act Section 404(c) regulations. Section 404(c) allows plans to permit participants to exercise control over the assets in their accounts (relieving the plan sponsor of some fiduciary responsibilities), but the plan must provide participants with an opportunity to obtain sufficient information to make informed investment decisions. If an adviser has not conducted an educational workshop in the past year, it is possible plan participants may not have sufficient information to make proper decisions regarding their investments. When there is an educational workshop, be sure participants confirm their attendance. Participants who decide to forgo the workshop should also sign a form acknowledging their decision.

4. Does your plan offer index funds, exchange-traded funds (ETFs), or other low-cost investment options? If no, add 0 points. If yes, add 12 points.

In addition to performance, low investment cost is a benefit. Participants therefore like index funds and ETFs. Most plans offer an S&P 500 Index option, and many offer other index funds as well. The S&P Composite Index of 500 stocks (S&P 500) is a group of unmanaged securities widely regarded by investors to be representative of large-company stocks in general (an investment cannot be made directly into an index).

5. Does your plan offer professionally managed models based on a participant's risk tolerance or anticipated retirement date (target maturity funds)? If no, add 0 points. If yes, add 8 points.

Many participants are overwhelmed with the investment options in their plan and feel ill-equipped to select and then monitor their choices. Asset allocation models make the process easier. Plan vendors often provide risk-tolerance questionnaires that, when completed, direct a participant into one of three to five already diversified models based on their risk score. Choices include conservative, moderate, and aggressive models. Another type of asset allocation model, called a target date model, is based on a participant's anticipated retirement age. These models start with an appropriate mix of equities and fixed-income funds based on one's retirement date; this mix then automatically becomes more conservative as the participant nears retirement age.

6. Do you routinely review the list of terminated participants and "force out" those with balances under $5,000? If no, add 0 points. If yes, add 4 points.

Many plan sponsors may be unaware that small balances for terminated participants can be "forced out" of the plan, which can help reduce administrative costs. In addition, terminated participants can often be difficult to locate. Since disclosures periodically need to be distributed to all eligible employees and participants, including terminated participants, removing them from the plan will make it easier to satisfy delivery. What are the rules? Balances below $1,000 can be sent directly to terminated participants, and balances between $1,000 and $5,000 can be transferred to an individual retirement account. Your third-party administrator can help facilitate this process.

7. Do you ensure annual disclosures and participant notifications are properly distributed by required due dates (i.e., fee disclosures, qualified default investment alternatives, and, if applicable, safe harbors)? This would include the need to provide notification for any investment changes. If no, add 0 points. If yes, add 8 points.

Annual disclosures are generally completed by third-party administrators and/or plan vendors and need to be distributed to all eligible employees, and active and terminated participants. Investment changes need to be communicated to all eligible employees and participants as well, in advance of the changes. Plan sponsors need to adhere to strict deadlines. Some recordkeepers will handle these responsibilities for a nominal fee.

8. Do you periodically review your annual administration costs and compare them with companies of your size? If no, add 0 points. If yes, add 8 points.

Administration costs come in different varieties. Some retirement plan vendors or third-party administrators charge a fee based on the number of participants or the number of eligible employees; others base the fees on the average participant's balance. Some even charge a flat fee. Based on your demographics, which method is most favorable? Review your administration fees to ensure they remain competitive relative to other companies of your size.

9. Do you periodically review your investment management fees (and asset fees, if applicable) and compare them to companies of your size? If no, add 0 points. If yes, add 12 points.

Investment management fees can vary greatly from plan to plan and are often based on "class share." These class shares come in many varieties and are identified with a letter following the investment option (i.e., A, I, R, etc.). An asset fee is another layer of investment costs and, like investment management fees, is deducted from investment returns and can therefore be difficult to monitor. Asset fees are generally based on the level of plan assets and should tier down as plan assets increase. Many people focus on each of these fees separately, but plan sponsors need to compare the total fees to those generally paid by other companies of similar size to ensure they remain competitive.

10. Have you reviewed how plan costs are assessed? If no, add 0 points. If yes, add 12 points.

If you haven't reviewed how plan costs are assessed, you may not know if they are equitably distributed among participants or whether some pay a proportionately larger portion of the plan's administrative costs.

Retirement plan recordkeepers provide a number of services to plan sponsors and participants. In addition to recordkeeping, they provide:

  • Administrative services that include transaction processing.
  • Statement production.
  • Call center staffing.
  • Delivery of required notices and/or participant disclosures.

Moreover, there is the cost of a plan adviser. How are these fees paid? If the menu of investments includes only lower-fee funds (i.e., index options or ETFs), an "asset fee" is generally added to compensate the recordkeeper and adviser. In this scenario, the cost is equally shared among all participants. If the lineup does not include index options and/or low-cost fund choices, the investment menu will include higher-fee funds, ones whose expense ratios include a portion that is shared with the recordkeeper to help defray the administrative costs listed above (hence the term "revenue sharing"). Some recordkeepers today are able to credit the revenue-sharing portion to the participant investing in the option and not use this to defray plan costs (thought to be a more equitable way of distributing costs). In this case, the recordkeeper may add an asset fee to offset overall plan costs.

In practice, many plan menus will include both lower-fee funds and higher-fee funds, some that include revenue sharing and some that do not. In this scenario, each participant's selected funds support a different percentage of administrative expenses, based on the funds the participant chooses and how much the participant has invested in these funds. This practice of using revenue sharing to pay for plan expenses is not uncommon.

While plan participants receive detailed information about the expenses of each plan investment option, a closer look at the expense component may reveal that a participant who selects higher-fee funds that provide for greater administrative revenue payments is effectively bearing a larger portion of a plan's administrative expenses than others who select lower-fee funds that pay little or no revenue toward the administrative costs. This is particularly true with investors who use actively managed funds versus investors who use passive index funds.

A plan that provides for equalization of fund revenue is designed so that all participants bear a similar percentage of the total plan's administrative services, no matter which investment funds they choose. In the end, transitioning to a lineup on an open architecture platform with low-fee options and an asset fee may distribute costs more equitably among participants.


If you scored 80 to 100: great job! Your company retirement plan is being reviewed sufficiently in all areas. Keep it up!

If you scored 70 to 79: good job. You may be able to improve your plan with only a few minor changes. Your adviser or plan provider can help suggest changes that will benefit the program.

If you scored 60 to 69: fair job. You may benefit by asking your adviser or plan provider for help. If your adviser and provider are unable to help you make the necessary changes, you may benefit by meeting with an investment professional who specializes in the retirement plan market.

If you scored below 60: You may have significant fiduciary exposure and would benefit by meeting with a professional who specializes in the retirement plan market.

About the authors

Alan J. Fishman, CLU, CFP, is an investment adviser with Yorktown Financial Group in Elkins Park, Pa. Charles V. Creighton, CLU, ChFC, is an investment adviser with Evolution Financial Group in Media, Pa.

To comment on this article or to suggest an idea for another article, contact Ken Tysiac, a JofA editorial director, at or 919-402-2112.

AICPA resources



  • Employee Benefit Plans — Audit and Accounting Guide (#AAGEBP18P, paperback; #AAGEBP18E, ebook; #WEB-XX, online access)
  • Employee Benefit Plans Industry Developments — Audit Risk Alert (#ARAEBP18P, paperback; #ARAEBP18E, ebook)

CPE self-study

  • Auditing Employee Benefit Plans (#733842, text; #153007, online access; #GT-EBPE-C, group pricing)
  • Audits of 401(k) Plans (#733852, text; #154845, online access; #GT-AFKP, group pricing)

Certificate programs

  • Advanced Defined Benefit Plans Audit Certificate Exam (#164750, online access; #GT-ADBP-EXAM, group pricing)
  • Advanced Defined Contribution Plans Audit Certificate Exam (#164740, online access; #GT-ADCP-EXAM, group pricing)
  • Advanced Health and Welfare Plans Audit Certificate Exam (#164760, online access; #GT-AHWP-EXAM, group pricing)
  • Intermediate Employee Benefit Plans Audit Certificate Exam (#164730, online access; #GT-INTEREBP-EXAM, group pricing)

For more information or to make a purchase, go to or call the Institute at 888-777-7077.

Where to find November’s flipbook issue

The Journal of Accountancy is now completely digital. 





Get Clients Ready for Tax Season

This comprehensive report looks at the changes to the child tax credit, earned income tax credit, and child and dependent care credit caused by the expiration of provisions in the American Rescue Plan Act; the ability e-file more returns in the Form 1040 series; automobile mileage deductions; the alternative minimum tax; gift tax exemptions; strategies for accelerating or postponing income and deductions; and retirement and estate planning.