Many executives only think of their 401(k) when receiving a plan financial statement. They don’t consider plan operations, potential pitfalls or their basic duties in operating plans. A set of recently released regulations is systematically forcing that mindset to change.
Plan sponsors’ and fiduciaries’ duties to a plan and its participants were clarified by the new regulations. Patrick M. Shelton, GBA, managing member of Benefit Plans Plus, LLC, says, “Legally, plan sponsors are now required to have intimate knowledge of and communicate specific plan information to participants. If they fail to do so, they could face regulatory penalties, legal action from employees or get embroiled in class-action lawsuits.” He says most information must be communicated at least annually to participants, even those who have left the company but still have plan balances.
Smart Business spoke with Shelton about plan regulations and the critical importance of “benchmarking.”
What is the key determination?
Under federal law, plan fiduciaries must act ‘prudently’ and ‘solely in the interest of plan participants and beneficiaries’ to ensure a plan pays covered service providers (CSP) no more than ‘reasonable’ fees. Sponsors must review and understand all plan fees and then formally communicate them. While costs are important, they are not the only consideration. Lowest cost is rarely a determination of a well-run and effective 401(k) plan.
What are the new regulations?
Regulations are under section 408(b)(2) of the Employee Retirement Income Security Act (ERISA) and are designed to help plan fiduciaries ensure that plan service arrangements are ‘reasonable.’
The regulations impose a duty on every plan CSP to provide information to plan fiduciaries necessary for them to assess the reasonableness of CSP compensation, identify potential conflicts of interest, and satisfy reporting and disclosure requirements.
ERISA section 404(a)(5) regulations require fiduciaries — of plans allowing participant directed investments — to provide specific information designed to enable participants to make informed investment decisions. General plan and administrative and individual expense information are required.
What is benchmarking and how can it help determine ‘reasonableness’?
Benchmarking is a process for compiling and comparing plan data to plans with similar design and demographics. Data might include plan design, including its underlying details, eligibility requirements, benefit or contribution formulas; assets; direct and indirect administrative costs; investment choices; compliance; and performance.
Benchmarking simply assists fiduciaries in determining a basis for reasonable fees. If fees are higher than average for similar-sized plans, there should be a clear explanation of why more is being paid.
What are some best practices?
You should benchmark your plan every three to four years, recognizing that the costs of professional reviews vary widely from $1,500 to $25,000. You should use benchmarking services that provide relevant data and rotate service providers to vary the results and avoid biases. You should also ask about the methodology to ensure you get valid information. In addition, you should maintain results in a file where all 401(k)-related information is readily accessible and periodically review the results and form an action plan to bring your plan in line with company philosophy and values.
Most benchmarking providers don’t adjust their comparisons by region and often extract unfiltered data from public sources. Further, while more plan data is becoming available, currently there’s not strong benchmarking data for small plans, or those with fewer than 100 participants.
What happens if you’re out of compliance?
Plan sponsors and fiduciaries are personally liable for any failure to procure the required information from CSPs. However, the regulations contain a ‘safe harbor’ method of complying — shifting responsibility to non-compliant CSPs and notifying authorities. In most cases, CSPs provide disclosures on a quarterly and annual basis that are designed to be compliant with all of the rules.
Patrick M. Shelton, GBA, is managing member at Benefit Plans Plus, LLC Reach him at (314) 824-5252 or firstname.lastname@example.org
For more information regarding fiduciary responsibilities, visit www.bpp401k.com/fiduciary-health-check.
Businesses often need to evaluate where they are in order to decide where they want to go, and sometimes the best way to do that is by comparing themselves to a standard.
“In today’s world of sharing information, companies can now drill down to specific cost drivers within workers’ compensation, direct medical care, direct pharmacy source and litigation management, to name a few,” says Daniel Slezak, vice president at ECBM. “Benchmarking has proven to be a most valuable process for identifying performance improvement areas. Once the information is shared in scale, you can identify the best-performing companies, which leads to the identification and implementation of best practices.”
Smart Business spoke with Slezak about how to benchmark your risks and lower your costs as a result.
What are some risks that companies need to manage?
If you start with the premise that an organization needs the commitment of top management, other risks come into play when the doors of the business first open. Some risks to keep in mind are:
- Employee hiring and screening practices. Without proper personnel, you cannot grow your business.
- Safety education, orientation and training. Once you have a trusted employee base, you need to have a constantly evolving safety message.
- Worker involvement. When you allow employees to buy in to your message and take ownership, performance improves.
- Recognition and rewards.
- Accident and incident investigations. When a problem occurs, you need to determine why and then take corrective measures.
- Drug and alcohol testing can enhance your positions and mitigate ultimate cost.
Once a company has addressed these basic risks at its foundation, it can move on to more specific areas, depending on its operations. Some examples include personal protective equipment, IT backup and security, and having well-maintained vehicles.
What are the benefits to benchmarking risk management costs?
Every business faces the possibility of accidental loss of property, income, liability and injury to its employees. If you are committed to minimizing those losses, insurance brokers and risk managers have the resources to put in place a plan that will possibly engineer solutions or effectively educate employees on a strategy you can enforce. The ultimate benefits are safe, healthy employees who are more productive with their working activities.
What are some examples of best practices?
The concept of benchmarking in insurance is simple — provide guidance to a company that will be shared with management and show them that the terms of coverage and cost are reasonable relative to other similar organizations.
You also can dig into the elements that make a program successful. For example, in workers’ compensation, you need to know your medical versus indemnity split of claims. The more claims you keep as medical only, the more the total cost of claims drops. As you measure your company against others, determine what program you could have in place to achieve the best practice. Then ask if it is something that is manageable.
You also can look at the closure rate. How long are your claims staying open? Are you getting employee back to work? Best efforts are not acceptable; your company needs to strive for best practice as the goal.
By drilling down within your vendor costs, you can eliminate extra expenses by knowing best practices before implementing them. Medical bill repricing can vary greatly by vendor. As an example, a risk management consulting firm recently effected a simple change in a client’s program that is projected to save it millions of dollars, in a client’s program that is projected to save it millions of dollars, which we personally just achieved with a client.
What pitfalls do companies encounter when benchmarking?
The most critical concern is choosing the correct peer group. Your broker will align you with the same industry and company size, but the geographical footprint also needs to be considered. For example, if you have a retail operation with stores located in mostly urban areas, you can’t expect the same results as someone with a high concentration in suburban areas when it comes to general liability or workers’ compensation claims. Another pitfall is failing to engage top management. The team has to be on the same page throughout the process so that expectations are set, measured and supported in a timely fashion.
How can you compare risk management practices and costs to other similar companies?
Risk management consultants constantly use benchmarking to determine adequate limits and pricing models. The data available today allows you to determine if you are carrying adequate directors and officers limits and what terms and conditions are available. This type of measurement can be used on other lines of coverage as well. It starts with having credible information about your own company. Most actuaries want to look at 10 years if you are trying to establish your own triangle of losses for a workers’ compensation rate. However, if you have at least five years, the actuary can identify trends and cost drivers. Keep in mind that some benchmarking, such as policy terms conditions and pricing, is a snapshot view of one year comparing your company to the ‘pool’ at a point in time.
With your data in hand, contact an insurance broker. Most quality brokers have the ability to access databases, such as RIMS Benchmarking Survey, NCCI and Advisen, for comparisons. Tillinghast Towers Perrin D&O Survey is universally regarded as an excellent source of information on D&O. Then, by implementing best practices for managing risks, you can lower costs, increase productivity and make top management smile.
Daniel Slezak is a vice president for ECBM. Reach him at (610) 668-7100, ext. 1323, or email@example.com.
Insights Risk Management is brought to you by ECBM Insurance Brokers and Consultants