Like retirement plan participants, plan sponsors can be a bit apathetic at times when it comes to their workplace retirement plans. Once they choose a plan provider, many of them never revisit the decision again and that could spell trouble for the plan, the company and its participants.
Ary Rosenbaum, managing attorney with The Rosenbaum Law Firm P.C. in Garden City, N.Y., says that as fiduciaries, plan sponsors need to review their plan and provider at least once a year, if not semi-annually or quarterly.
“If you don’t review plan providers, you don’t know how they did. Too often plan sponsors think they like the provider, like what they’ve always been doing, but if they don’t check to see what work has been done, they are shocked when they get audited by the Department of Labor or the IRS for glaring problems that were there all the time,” he says.
And although it doesn’t happen often, there are times when plan sponsors should consider firing their plan provider.
Communication is the No. 1 thing plan sponsors should review when determining whether to fire a plan provider, says Rosenbaum. Recordkeepers should be in constant contact with their plans and be responsive when a plan sponsor has a question. If they aren’t, that is grounds for dismissal, he says.
Bruce Ashton, a partner in Drinker Biddle & Reath LLP’s employee benefits & executive compensation practice group in Los Angeles, agrees that unresponsiveness is a problem.
“If my client asks for information, they ask for clarification of something and there’s just no response. I don’t see that very often. Occasionally I do. To me that’s a sign that maybe they forgot the ‘service’ part of provider,” he says.
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Another big issue is if a plan sponsor calls up the company’s recordkeeper and never talks to the same person twice. “You don’t have a dedicated service representative. To me that’s not a good sign in a service provider,” Ashton says.
High fees are also a reason for firing your 401(k) provider. Fee disclosure rules went into effect three years ago so fees have come down quite a bit. Plan sponsors should hire someone to benchmark their plan fees to see whether they are reasonable, Rosenbaum says.
“So many factors go into determining whether fees are reasonable or not,” he says. For 401(k) plans, the biggest factors are the number of plan participants and the amount of plan assets.
“What’s reasonable for a $1 million plan is not reasonable for a $10 million plan, so many plan sponsors are being sued,” he says.
What’s reasonable for a $1 million plan is not reasonable for a $10 million plan, so many plan sponsors are being sued.
Rosenbaum adds that if a plan sponsor has a good provider that is giving them a lot of bells and whistles it isn’t fair to compare that provider to one who does not offer that same level of service.
Making mistakes is another big issue that could lead to a plan provider getting fired.
Errors happen but it is the way a plan provider reacts to the errors that is a key indicator of whether they are the right provider for your plan. If they apologize immediately for their mistake and attempt to fix it, they are probably a good provider.
“To me, you have to own up to mistakes and correct it in a reasonable fashion. That is always the biggest thing,” Rosenbaum says.
Nancy Ross, a partner with Mayer Brown in Chicago, says that she has seen numerous instances where plan providers made mistakes in plan calculations but they wouldn’t stand by their mistakes or try to correct them.
Ashton says he has seen cases where plan providers made repeated errors and even though they would quickly fix them, they would keep making the same error over and over.
“I’ve seen some situations where the recordkeeper made an error and agreed to fix it but wanted to charge the client for fixing it. Frankly, that is outrageous to me. I don’t see that often, but I have seen it a couple of times,” Ashton says. “It always surprises me that a service provider would want to do that. They seem to forget the service part of the provider equation.”
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Another problem arises if the recordkeeper does not have the appropriate controls in place to ensure that they are complying with the retirement plan terms. Conflicts of interest are another reason to fire a plan provider, Ross says. Revenue sharing agreements can get convoluted and it has happened that a plan provider would hire another service provider for the plan. The service provider pays them a commission but the recordkeeper doesn’t return that commission to the plan.
“That’s a big no-no,” Ross says, pointing out that the Department of Labor is taking a hard look at service providers and how plans are dealing with service providers.
“They said that is their focus right now. If your service providers have a conflict, any appearance of a conflict of interest, where they are not acting for the plan’s best interest, you’ve got a real problem,” she says.
Most plan sponsors don’t change recordkeepers lightly. The biggest reason is that it is a lengthy process to do so, says Ashton. “They have to have a pretty good reason for doing it,” he says.
Many plan sponsors change recordkeepers as part of a merger or when their senior management changes. Most plans don’t change recordkeepers “as a result of ongoing persistent problems,” Ashton says. “Most of the time the change has to do less with dissatisfaction and more with the perceived advantage of going to a different recordkeeper.”
