Considering the costs associated with maintaining a retirement plan, the significance of retirement plan benefits to employees, and the increasing frequency of litigation related to these benefits, selecting the right retirement plan vendor is one of the most important decisions an employer will make as a fiduciary. With so many factors at play, it’s crucial that employers understand how to best navigate the vendor search and selection process to find a provider best suited to their organization.
When deciding whether it’s time to engage a new retirement plan vendor or third-party administrator (TPA), employers should consider the following:
- Has the business experienced problems with its retirement plan that may result in penalties and other unexpected additional expenses?
- Has the business recently performed a retirement plan review to determine if it’s getting the most from its current plan design?
- Could the business benefit from combining multiple retirement plans?
- Is the business paying the right amount for the support that it receives from its current service provider?
The Employee Retirement Income Security Act of 1974 (ERISA) requires plan sponsors to enter into reasonable agreements with vendors. It’s important that plan sponsors follow a thorough and well-documented due diligence process when selecting a vendor. The Department of Labor (DOL) recommends that plan sponsors obtain this information from multiple providers, carefully evaluate the services offered, and ensure that all fees — both direct and indirect — are reasonable relative to the value provided. The selection process shouldn’t focus solely on cost but rather on the provider’s ability to deliver high-quality services that align with the plan’s needs and the interests of participants. While the DOL doesn’t require plan sponsors to go through a proposal process, it’s the best (if not only) way to know whether the fees a plan sponsor is paying are reasonable compared to the market — so a competitive proposal process will be the best “starting point” for most employers.
These key considerations can help employers identify the vendor best suited for them and their retirement plans.
Start the vendor management process with an RFP
The request for proposal (RFP) process helps employers evaluate potential retirement plan vendors and simplify what can become a rigorous and time-consuming effort. It also serves to articulate criteria that may lead to a more standardized pool of responses, potentially making it easier to compare possible providers. Here are some steps employers should follow when starting the RFP process to identify a plan vendor:
- Prepare a detailed RFP that focuses on questions that provide insight into the essential attributes that service providers must possess.
- Review and analyze proposals to prepare a detailed comparison of responses.
- Document the selection process, including the detailed comparison of responses, a fee comparison, finalist presentations, and an explanation supporting the ultimate decision.
Concurrently perform a retirement plan review
Employers that are searching for a retirement plan vendor can also benefit from a thorough review and evaluation of all current retirement plans. The primary goal of this process is to evaluate the design and costs associated with each plan and consider whether an alternative design and/or vendor could deliver better results. The review should include an examination of the plan documentation, analysis of the current contribution structure in light of the employer’s overall goals, and consideration of whether an alternative plan design may be a better fit for the company.
When a retirement plan review is performed alongside a plan service provider search, an employer gets a better picture of the benefits currently provided, the costs currently incurred, and the advantages and disadvantages of possible changes. In some cases, when the RFP responses are received and measured against the services and costs associated with a current plan, it may become clear that the best solution may be to continue with the current vendor and renegotiate aspects of the current agreement that could be improved.
Reviewing your retirement plan vendor isn’t a one-time occurrence
Plan fiduciaries should make it best practice to establish and follow a formal, regular review process for all service providers. While the DOL doesn’t mandate a specific interval in its regulations, authoritative guidance and industry practice — supported by DOL commentary — suggest the following:
- Annual reviews. You should review your plan’s service providers, including their performance, fees, and compliance, at least once a year. This annual review should include reading reports, checking actual fees charged, and following up on any participant complaints.
- Formal benchmarking or RFP. Industry experts recommend conducting a formal benchmarking process or issuing a request for proposal (RFP) every three to five years. This process ensures that fees and services remain competitive and that the plan continues to operate in the best interests of participants.
Seek independent advice
Few businesses have the time or expertise to thoroughly evaluate the effectiveness of their retirement plans and vendors. Most employers will benefit significantly from outside support provided by an independent consultant who regularly performs retirement plan reviews and vendor searches. Independent consultants typically charge employers a flat rate for a service engagement, as opposed to brokers whose compensation structures may include ongoing commissions or revenue from assets on an ongoing basis.
Most employers will perform benefit plan compliance reviews and vendor RFP processes infrequently, while independent consultants who focus in this area serve multiple clients every year and have considerable experience performing these tasks on a regular basis. Reliance on an independent consultant can free up an employer’s internal resources to manage day-to-day operations while the current plans and proposals are reviewed and evaluated by experts who specialize in employee retirement plans and ERISA standards.
