Nicholas Zaiko, CIMA
Service Provider Due Diligence
Selecting and effectively monitoring defined contribution plan service providers is an essential fiduciary duty of the plan sponsor which influences retirement outcomes for its employees. The plan sponsor or Committee overseeing the defined contribution plan shares this responsibility for the prudent management of the plan for the benefit of the participants.
Fiduciary Reasons for Conducting a Provider RFP
In the ERISA Section 408(b)(2) fee disclosure rules, the Department of Labor (DOL) assumes that a prudent plan sponsor has a fiduciary duty to establish and follow a formal review process at reasonable intervals, generally three to five years, to ensure the caliber of the selected DC provider and that the services are being delivered at a "reasonable" cost. Typically, a plan sponsor can conduct this due diligence review by issuing a service provider RFP.
Types of Service Providers
There are a full range of DC plan service providers that are either independent or affiliated with different types of institutions that include: TPAs (third party administrators) or independent recordkeepers, mutual fund companies, insurance companies, banks, and brokerage firms.
Bundled or Open Architecture
In order to properly operate a qualified DC plan, an array of services are necessary. Those services include recordkeeping administration, trustee/custodian services, compliance testing, investments, legal update of plan documents, government reporting and participant education. Bundled service providers offer the full spectrum of services necessary to operate a qualified plan under one contractual arrangement. A bundled provider includes plan administration, recordkeeping, trustee, legal, investments, participant communication and education. Defined contribution plans, such as 401(k), 403(b) and 457, that are open architecture may use multiple service providers that perform each role. In such a situation, the plan sponsor would issue RFPs for each of the various services.
A well-documented due diligence review enables plan sponsors to fulfill their fiduciary duty to prudently monitor their service plan providers. A multi-purpose RFP covers the services of key providers necessary to operate a 401(k) or 403(b) retirement plan. The design of the questionnaire is the first step in the evaluation process when benchmarking providers.
The process starts with the Request For Proposal (RFP) and should elicit information about the provider’s services, expertise, client commitment and compliance experience with clearly detailed costs.
The RFP process can be a benchmarking tool to assess the quality of the plan’s services, potential upgrades to the plan and serve as a resource to evaluate the reasonableness of plan fees. Periodic, unbiased benchmarking documents the plan sponsor's fiduciary process to monitor the quality of plan services and fees.