As part of your fiduciary compliance responsibilities as a plan sponsor, you should regularly review the providers that work with your 401(k) plan. The Department of Labor suggests plan sponsors do so every year if plan assets are used to pay plan fees and least every three years with other fee arrangements. As a fiduciary, you have an obligation to ensure that your providers are appropriate and that the fees you are paying for their services are reasonable.

The DOL does not require you to make any provider changes as a result of your reviews. Nor does it mandate that you work with the lowest cost provider. All that is required is that you determine that fees paid are reasonable. However, the 401(k) plan marketplace is very dynamic and you are likely to discover some surprises when you conduct provider reviews. Following are suggestions for managing a 401(k) provider review process.

Step 1: Start with your investment adviser

A good investment adviser can add genuine value to the operation of your plan. Competent advisers save plan sponsors at least as much as they charge in fees each year. Work with an investment adviser who:

· Is paid a consulting fee in “hard dollars” for services outlined in invoices you receive. All services should be described in detail in a contract. Try not to work with advisers who are product-oriented and are paid in “soft dollars” (compensation that you do not see that flows from mutual funds to investment advisers).

· Works for an organization that is willing to acknowledge its fiduciary responsibilities in writing, without limitations. Brokers, bankers and insurance company advisers place limitations on their fiduciary responsibility. Registered Investment Advisers (RIAs) are required by law to act as fiduciaries without limitations.

· Specializes in working with 401(k) plans. The 401(k) plan business has become way too complex for someone who is doing it as an ancillary or side business. Many CEOs have hired their personal financial adviser to help manage their company’s 401(k) plan. Others use their bank. A number work with their insurance companies. These are not good solutions. Hire a 401(k) investment adviser who works for a company whose core business is providing 401(k) investment advisory services. Today's complicated 401(k) plan marketplace requires a specialist.

· Has the experience and knowledge to manage your recordkeeper, trustee and custodian relationships for you, saving you a lot of time.

If your adviser does not meet all the criteria outlined above, stop right here and start searching for another. Construct a list of advisers in your area by Googling “401(k) investment adviser.” Reach out to the five that look good and ask for proposals. Bring in the best three to present.

Step 2: The recordkeeper RFP/RFI

A qualified investment adviser can manage the remainder of the provider review process for you. He/she should be able to supply you with a draft Request for Proposal (RFP) or Request for Information (RFI) document that you can review and customize. Your adviser should take care of emailing it out to the recordkeepers and collecting responses.

I use RFP documents for my clients who know they want to make a change and RFI documents with clients who are interested in checking provider fees and services. Since the recordkeeping business has consolidated significantly, you can comfortably consider just three or four recordkeeping firms (including your existing provider).

Most recordkeepers bundle trust and custody services with recordkeeping, or can serve as trustees and/or custodians. Make sure your RFP/RFI includes questions about these services.

Your adviser should receive all electronic responses and summarize them in a spreadsheet that will allow you to compare services as well as price.

Step 3: RFP/RFI evaluation

As you review the RFP/RFI summary spreadsheet, keep in mind the following:

· The recordkeeping business is technology-driven. Ensure that the recordkeeper you select has a commitment to technology improvement in the future. Check this by asking what the company has budgeted to spend in the next year on technology enhancements and what those enhancements will be. The best technology-driven recordkeepers improve their websites every year.

· Visit the websites. Your participants' opinion of your 401(k) plan is heavily influenced by the recordkeeper website they encounter. This website will be the only contact the majority of your participants have with your plan. The website (and whether you like it) is one of the most important differentiators between recordkeepers. The major recordkeepers take different approaches to their websites, so be sure to thoroughly review each site.

· Review sample participant statements. This is one document every participant looks at. They need to be easy to understand or you will get a lot of phone calls.

· Make sure you hire a corporate trustee if you don't already work with one. I still talk to large companies that have individuals (senior corporate executives no less) serving as trustees of their 401(k) plans. Given how litigious our society has become, this doesn’t seem to be a risk that is necessary for corporate executives to bear, especially since the cost of a corporate trustee is only around $1,000 per year.

· Consider the market segment you represent. A good investment adviser will bring you a set of potential recordkeepers that make sense for the size plan you have. Make sure you agree. A good way to check is by the type of references the recordkeepers give you. It also doesn’t hurt to ask what their average client size is and where their clients tend to be located.

Up to this point I haven’t shared much information about costs. The 401(k) plan marketplace is super-competitive. Most recordkeepers offer services that are similar to their competitors’ and similarly priced. In my opinion, if you receive a quote that is quite a bit different from the others (either significantly higher or lower) then it is fair to assume that provider does not work a lot with plans your size and would not be a good fit.

Since the 401(k) plan marketplace is so competitive, price can be an area of negotiation. This is not something that I see plan sponsors take advantage of enough. If you like a particular recordkeeper and feel it would be a good fit, but their fees are just a little higher than a competitor’s, ask it to match the competitor’s price. I have not heard of an instance recently where a provider was unwilling to make a price adjustment if it thought it was going to get the business.

Step 4: Conversion

Normally, 90% of all provider searches conclude by October. That is because the vast majority of 401(k) plans have Dec. 31 year-ends and most plan sponsors like to convert to new providers effective with the new plan year beginning Jan. 1. If your plan year ends Dec. 31, there are good reasons not to run with the crowd:

· Your conversion may flow much more smoothly if you choose a conversion date other than Jan. 1. Recordkeepers are exceedingly busy with Jan. 1 conversions. You have greater odds of receiving much better service, and someone at the recordkeeper's office might actually return your phone calls, if you choose another date.

· You wanted to take time off during the holidays and not answer 401(k) plan questions, right? Those last-minute, critical decisions that need to be made to keep your conversion on track are out there waiting to ruin your holiday cheer.

· Where are all your employees and why is no one attending your employee education sessions? Aren’t they as excited about the new plan as you are? Not if you are scheduling employee education sessions between Thanksgiving and New Year’s Day. If you think that scheduling employee education sessions in early November is a better idea, it isn’t, because everyone will forget about all the new, neat features of the plan by the time your plan emerges from conversion.

So what is the solution? Scheduling a conversion for any date other than Jan. 1 will be much easier on you, be welcomed by your recordkeeper and make better sense to your employees. If you decide to do this, your new recordkeeper may give you a reduction on your conversion costs.

According to the DOL, reviewing your providers regularly is your fiduciary responsibility. Even if you don’t make a provider change, file the RFP/RFI summary in your plan file. It is great documentation of your due diligence.

Robert C. Lawton, AIF, CRPS is the founder and President of Lawton Retirement Plan Consultants, LLC, a RIA firm helping 401(k) plan sponsors with their investment, fiduciary, employee education and compliance responsibilities.

Register or login for access to this item and much more

All Employee Benefit News content is archived after seven days.

Community members receive:
  • All recent and archived articles
  • Conference offers and updates
  • A full menu of enewsletter options
  • Web seminars, white papers, ebooks

Don't have an account? Register for Free Unlimited Access

Robert C. Lawton

Robert C. Lawton

Robert C. Lawton, AIF, CRPS is president of Lawton Retirement Plan Consultants, LLC, an RIA firm helping retirement plan sponsors with their investment, fiduciary, employee education and compliance responsibilities.