Step 4 Toward Fiduciary Wellness: Vendor Benchmarking
Much of the 401(k) plan fee litigation involves allegations of two distinct levels of unreasonable fees: (1) the plan’s investment options; and (2) recordkeeper/vendor fees. Concern about litigation is one reason to benchmark your recordkeeper fees, but it’s certainly not the only one. Today we’ll identify four distinct reasons to perform the benchmarking and describe the best practice for maximizing the value of the benchmarking process.
Health Insurance Shopping. First, though, let’s think about your company’s health insurance. Is that an obvious place to start? Perhaps not, but we believe that process helps us to consider how to evaluate your recordkeeper.
- When you assess your health insurance premiums, do you approach your current vendor and merely ask if you’re paying the national average? Of course not; you use a broker or consultant to scour the competitive marketplace and secure quotes.
- When you receive those quotes, do you merely look at the monthly premiums and ignore the details? Of course not; you dive deeply into the details to best understand the value. Deductibles. Out-of-pocket maximums. Network size. Prescription drug benefits. Claims reputation.
- Do you perform that exercise every five years? Or do you wait 10 years or more? Of course not; you likely review your health insurance coverage every year or two.
Retirement Vendor Pricing. Why is the approach so different for many companies’ retirement plan vendor services? One could argue, in fact, that you should be even more diligent in the retirement plan context because of your fiduciary risk. There are four primary reasons to be sure you’ve benchmarked your recordkeeper (and TPA, if applicable):
- Federal Regulations Suggest It. The 408(b)(2) regulations provide a prohibited transaction exemption only if you can demonstrate that fees paid to covered service providers are no more than reasonable. Responsible plan fiduciaries need to understand the market in order to demonstrate reasonableness.
- Federal Courts Suggest It. Federal courts have established an expectation that you perform some sort of benchmarking – which could be a full blown RFP, but need not be – every three years. They have suggested this frequency as a means to satisfying your fiduciary duty of prudence.
- The Vendor Marketplace Has Evolved Quickly. In the wake of increased fee disclosure, the nation’s best recordkeepers have evolved admirably. Transparency and competition have driven down the market rates for recordkeeping services. Meanwhile the good recordkeepers have innovated and developed a focus on driving positive participant outcomes. You can now get more for less.
- You Care About Your Employees. This one is simple. You fight and scrape to secure premium savings and value improvements for your health insurance and other employee benefit programs. Your employees would appreciate your doing the same for their key source of retirement savings.
Test the Marketplace. The “check the box” benchmarking options are inferior to the one your organization applies in the health insurance context: testing the market. Some will encourage you to use an industry publication or web-based service. Whether you’re benchmarking from a book or a website, you could probably use one of those to check the fiduciary box. But creating competition is the best way to demonstrate genuine care for your employees. Your advisor should be well-situated to assess the current fee and service levels, and to secure proposals from other recordkeepers.
Closing Comments. We recommend that plan sponsors not view this process as one that necessarily will require a move to a new provider. Our preferred outlook, instead, is to seek better pricing, better service, or a combination of both. That mindset positively and naturally takes us into tomorrow’s entry, which will focus on caring for your employees.
Matthew loves to write. He also loves to think, though he’s probably a better writer than a thinker. He does not like to be on camera or in videos. This blog will allow him to write, challenge his ability to think, and, from time to time, test him with video blog entries.
He has a unique blend of legal and practical experience that helps us to serve our clients well. On the one hand, he has more than 12 years of private legal practice experience focusing exclusively on employee benefits, including time as a partner in an employee benefits boutique where he has represented clients in front of the DOL and IRS. On the other hand, he holds his FINRA Series 7 and 66 registrations and serves as the Director of ERISA Services for Qualified Plan Advisors.
Matthew likes to stay active. He provides fiduciary training, Investment Policy Statement design, and vendor oversight to our clients. He is an active member of the Employee Benefits Committee of the American Bar Association Tax Section, serving as Chair of the Defined Contribution Plans Subcommittee. He also has been appointed to the IRS TE/GE Gulf States Council and is a frequent speaker on regulatory developments, fiduciary responsibilities, and retirement readiness.
Most importantly, he stays active with his family. His wife, Laura, is the founder of REbeL, Inc., a not-for-profit organization. His three young boys are mixed up in far too many sports, and they enjoy traveling, watching college football, running with Dad, and rooting for the Huskers.
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