When a plan is examined by regulators or a suit is brought by a participant, how and why providers are chosen are always at the top of list or requested documents.  This is traditionally done through a Request for Proposal (RFP) process.    As it states, it is a process, not simply a document and a decision.   

If regulators or litigators question you two years from now, you will not have to rely on anyone’s memory, you will have actual documentation.

How and why you choose the provider is very important.    This process must be documented.  It is like in my high school math class when we would receive zero points for the right answer without showing how we derived this answer.  Not only did it prevent cheating and guessing, but also the math teacher wanted to see how we got to the answer.  It was the thought process and the reasoning. 

The same is true for selecting service providers.  The right answer in this case is “what is best for the participants,” but what is “best”?  I had to deal with this when I was Chief Compliance Officer for an investment firm.  It comes down to your rational and process which helps to show you have taken into consideration the needs of the participants which includes wisely and consciously you spend their funds.  Without proper documentation of the process, you cannot prove what you took into consideration and thus, if the service provider is “best” for the participants.

This is not to state that specific things such as fees and services should be ignored.  As the Department of Labor stated in their March 19th webinar, “A fiduciary has a duty to ensure that fees and expenses paid by the plan are reasonable in light of the quality and quantity of services provided. Both are important. The lowest cost providers may not be appropriate while high cost is no guarantee of quality.”

Fees should be close to with industry norms.  This does not mean you MUST choose the least expensive provider.  If the higher fees are due to the provider taking more responsibility, offering participants more services, having better in house compliance to help prevent losses or avoid problems then the additional cost may be justified to be the “best” for the participants.    You may choose a provider who has fees above the industry average, BUT you must be able to document the Plan’s justification for why this is “okay.” 

For the most part, best practices show that you should conduct RFP for all providers that provide services to a Plan at least every three (3) years if there are no major changes to your Plan or at your provider.  If changes occur to either of these, then you should conduct an RFP more often.

You must document all aspects of the search starting when the plan decides to conduct the RFP  which could be due to a change in the provider or your plan to a routine “every 3 years” review.  You then document who you spoke to, the proposals they submitted, your choice and ultimately why you choose who you chose and did not choose the others.

A few things to remember though: 

  • Do not use current providers or potential providers to help you.  You may use independent consultant to help you, however, if you use a current or potential provider, this creates a conflict of interest and you may be breaching your fiduciary responsibility.
  • You should review at least 3 providers.  If you like your current provider you like, include them.  Due to potential conflicts of interest, they cannot help you choose other providers to include.  If you need assistance, utilize and retirement plan compliance consultant such as OTB or an independent fiduciary such as Akros Fiduciary Management.
  • Document, document, document.
  • Whether you keep your current provider or choose another one, you need to update and institute a new contract with the provider selected.

There is a unique and new e-RFP compliance tool, launched this month by InHub.  Their web-based solution is specifically designed for investment advisor searches, but it can be adapted to any RFP’s being done (recordkeeping, pension administration, actuarial, trust/custody, etc.). The solution helps Plan Sponsors and the entire investment committee save time (and money), its streamlined and easy to use, and reduces risk by helping you document a prudent process.   You can learn more at www.theinhub.com.  

Next in the Series – Timing of Participant Contributions