More Important Than Most Fiduciaries Seem To Know
I really believe our Industry (anyone who has a securities license) has done the retirement plan industry a disservice. I make that blanket comment because after 21 years in the business I am still amazed how many plan Fiduciaries are not truly aware of what their responsibilities are. I continually run into companies that only have investment reviews and (maybe) participant meetings and feel they are “being taken care of.” I feel strongly that anyone who is servicing a retirement plan should have a service model that can clearly show how they are able to help their clients fulfill their fiduciary responsibilities.
The purpose of this article is to discuss how Fiduciaries can best fulfill the responsibility of hiring and monitoring their providers. This process seems natural for companies when they evaluate their health insurance considering that it is common practice to get quotes annually or every other year. Why do they do it that often? The most reasonable answer is that it is a large corporate expense. So why is it that companies, even those that continually do it for their health insurance, don’t monitor their retirement plans as diligently? My guess is because the majority of the costs are paid by the participants. The Employee Retirement Income Security act (ERISA) requires plan fiduciaries to act prudently and solely in the interest of the plan’s participants and beneficiaries…….(taken from the United States Department of Labor website). When you look at it that way, it is a pretty easy jump to see how it could be considered a breach of a fiduciaries responsibility, isn’t it?
For a plan Fiduciary, the liability extends to selecting and monitoring the providers that service their plan. They must be able to document that they have engaged in a meaningful analysis and comparison of their providers and their fees (In a future article I will go into detail why comparing your plan to industry benchmarks is not enough). While no law specifically requires plan fiduciaries to issue a vendor RFP and solicit bids, the process definitely demonstrates fiduciary prudence by showing they have the best interest of the participants in mind. The increase of 401(k) fee litigation shows that belief among many practitioners that engaging in the RFP process every 3 to 5 years constitutes “best practice.” Additionally, the Department of Labor, in a preamble to 408(b)(2) regulations, assumes that “plans normally conduct RFP’s from service providers at least once every 3 to 5 years.” (McKenna Long Aldridge 2012)
In addition to providing the necessary documentation of a prudent fiduciary practice, it has the additional benefit of maximizing cost savings for plan participants. A good RFP process places the Fiduciaries in the best and strongest position to negotiate with the current provider. “Even if you do not change service providers as a result of an RFP process, the information gathered could provide useful leverage in renegotiations and, if properly documented, serves as strong evidence that you are satisfying your duty of prudence under ERISA and that the fees paid by the plan are reasonable in light of the services needed.” (McKenna Long Aldridge 2012) We use a tool called the B3 Provider Analysis in our practice and it continually results in savings for both hard costs to the organization and to the plan participants.
Here is how I look at it, keep in mind I like to keep it simple: (1.) The Department of Labor (the same DOL that conducts random audits on plans) is saying they assume plans are conducting RFP’s every 3 to 5 years, (2.) Soliciting bids through the RFP process is a “best practice” according to a rising trend of fee litigation, (3.) Unless you get bids from other providers you don’t really know how a plan compares when it comes to cost, services and investments (Benchmarks can’t tell you this), (4.) it is leverage to have your current provider reduce their fees so that their costs are justified and in line with their competitors.
It seems so clear to me, even from just those few points, that every Fiduciary would be doing this. So why don’t they? From my experience it is usually because no one has told them this. Why? Here are some of the reasons I have come up with:
1. They don’t work with an advisor or consultant. If they work directly with the provider it is not likely that the provider will tell them they can get better investments, services and cost somewhere else.
2. They work with an advisor or consultant. If this is the case, maybe the advisor is not a specialist and doesn’t know these facts. Remember, I try and keep it simple: Either the advisor does know and hasn’t performed this process for the plan OR the advisor just doesn’t know – either way they really are doing a disservice to that plan and exposing the Fiduciaries.
3. They have been told all of this and don’t believe it is needed. If this is the case I would encourage them to read more about what the DOL and rulings from the courts have said about how best to monitor the service providers. In addition to that, look into how the DOL has increased the number of auditors and how these audits are not just for the “Big Boys.”
I am passionate about trying to educate plan Fiduciaries on how to best fulfill their responsibilities. When it comes to monitoring service providers, a properly executed RFP has proven to be the most agreed upon way to do that. If you are an advisor or consultant, I encourage you to help your clients to understand this. If you are a Plan Fiduciary and have not performed one for a few years, I hope this will spur you to do so but at least get you to start looking into it and asking questions.