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Practice Management

Plan sponsors should follow a four-step process to ensure that their providers are appropriate and that the fees paid are reasonable, says advisor Robert Lawton.

This Practice Management article is intended for financial advisors only (registered representatives of broker/dealers or associated persons of Registered Investment Advisors).

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 (DoL) suggests that plan sponsors do so every year if plan assets are used to pay plan fees, and at 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 neither requires 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 likely will discover some surprises when you conduct provider reviews. What follows are suggestions for managing a 401(k) provider-review process.

Step 1. Your investment advisor
A good investment advisor can add genuine value to the operation of your plan. Competent advisors save plan sponsors at least as much as they charge in fees each year. Work with an investment advisor 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 advisors who are product-oriented and are paid in “soft dollars” (i.e., compensation that you do not see that flows from mutual funds to investment advisors).
  • Works for an organization that is willing to acknowledge its fiduciary responsibilities in writing, without limitations. Brokers, bankers, and insurance company advisors place limitations on their fiduciary responsibility. Registered investment advisors (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 much too complex for someone who is doing it as an ancillary or side business. Many CEOs have hired their personal financial advisor 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 advisor 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 record keeper, trustee, and custodian relationships for you, saving you a lot of time.

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

Step 2. The record-keeper RFP/RFI
A qualified investment advisor 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 advisor should take care of e-mailing it out to the record keepers and collecting responses.

I use RFP documents with clients who know that 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 record keepers 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 advisor should receive all electronic responses and be able to summarize them in a spreadsheet that will allow you to compare services as well as price.

Step 3. The 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 record keeper 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 record keepers improve their websites every year.
  • Visit the websites. Your participants' opinion of your 401(k) plan is heavily influenced by the record-keeper 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 among record keepers. The major record keepers 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 advisor will bring you a set of potential record keepers 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 record keepers 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 record keepers 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 record keeper and believe he or she (or it) would be a good fit, but that the fees are just a little higher than a competitor’s, ask the record keeper to match the competitor’s price. I have not heard of an instance recently in which a provider was unwilling to make a price adjustment if it thought it was going to get the business.

Step 4. Conversion
Typically, 90% of all provider searches conclude by October. That is because the vast majority of 401(k) plans have December 31 year-ends and most plan sponsors like to convert to new providers effective with the new plan year beginning January 1. If your plan year-ends December 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 January 1. Record keepers are exceedingly busy with January 1 conversions. You have greater odds of receiving much better service, and someone at the record keeper'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 of 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 January 1 will be much easier on you, be welcomed by your record keeper, and make better sense to your employees. If you decide to do this, your new record keeper 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.

—by 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.

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