Making Sure 401(k) & 403(b) Fees are “Necessary” & “Reasonable” - Part One

As a plan sponsor, you are required to understand all of the fees that are associated your organization’s retirement plan benefit program. This is a challenge because plan fee structures are often opaque, complicated (needlessly so) and, sometimes, downright misleading. You are also required to ensure the services for which the plan is paying are necessary, meaning the plan wouldn’t function (or function as well) without them, and reasonable. Taken together these are one aspect of the “expert standard” you are expected to meet to fulfill your plan management responsibilities.

The most effective way to meet this fiduciary requirement is a Request for Proposals (RFP) process, typically run every three-to-five years. Why? The 401(k) and 403(b) markets are extremely competitive. They are constantly evolving and changing. We estimate that somewhere between 5-10% of plans go out to bid each year. A fraction of those actually make a change in their provider. Most, as a result of the process, achieve service and value advances.

Benchmarking using a third-party resource such as Fiduciary Benchmarks or The 401(k) Book of Averages is worthwhile as an interim check but because, by definition, these resources use historical information, the data doesn’t incorporate today’s competitive pricing and services. An RFP is the only way to achieve the kind of current, competitive information you need to evaluate your plan.

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As specialists working with retirement plan sponsors we conduct many RFPs for plan sponsors throughout the United States. Although many, many plan sponsors opt to use the services of professionals like us, we have created this guide to (1) help those who are considering or have decided to manage an RFP for themselves conduct a professional quality process and (2) help those who are considering or have decided to use a professional service by providing good information with which to evaluate candidates.

Whether you are planning to run the process yourself or are hiring someone to manage, you need to be aware of what best practices are among professionals in the field. You should also be able to identify and guard against potential conflicts of interest, be able to assess whether the steps the candidate indicates he/she will take in running the RFP are adequate to produce a satisfactory outcome. You are going to live with whatever decision you make for a long time. You want to get it right from the get-go.

Best Practices for RFPs

Conducting an effective RFP involves the decision and management skills you use in business every day.  As you would before undertaking any business activity, you need to do some pre-issue market research to help you identify the firms who specialize in working with plans your size. In order to assist you, FPG has created a one page guide that segments recordkeepers either according to their self-identified “target markets” or based on feedback from advisors and FPG affiliates with deep experience in retirement plans who have worked with many of the firms listed.  

The guide doesn’t list every recordkeeper. If focuses only on those we know. We believe it is comprehensive enough because within our network each firm has been tested and proven. Some of the firms may, in fact, serve markets that aren’t identified in the list. This is because we are using our experience to screen out those who may cover a market segment poorly or are too expensive, have service and/or feature defects or that we simply don’t have experience with in a particular market segment. The latter is the least likely given the extent of our experience. (We intend to update it regularly as more firms are identified and vetted. We welcome any input to supplement the information we already have).

This guide is important in making your RFP process efficient by offering you a “pre-screened” list of candidates we’ve tested over the year. This allows you to focus on what is essential to you, thereby making your use of time much more productive.

We suggest you contact at least six (6) firms or all listed if fewer are available. This may seem like a lot of work. (In fact, it is!) Remember, however, that you are held to the standard of an expert in matters of plan management. If you don’t have the resources to run an RFP as we are describing, find an independent consultant who can do it for you. For many reasons, including value and thoroughness, you’ll find this to be a better way to go.

Preparing your RFP questions

All too often RFPs are unwieldy things. In our view that’s because those who issue them are trying to have the RFP do too much. By following the process we’re describing and by using the resources we’ve created, an RFP of 12 items is fully sufficient to elicit the information you need to select qualified candidates for you to interview and select from among.

If you simply type “401(k) recordkeeper RFP” into a search engine you will gather a list of resources for preparing and managing an RFP process. Among the items you will find near the top of the page will be the Society of Professional Administrators and Recordkeepers (SPARK) RFP Preparation Document. It’s 39 pages long and covers pretty much everything and anything you might want to ask in an RFP.

Although much of the information in the SPARK guide is useful, even valuable, most of the recordkeepers we have included in our list already structure their proposals to address pretty much everything the SPARK RFP template asks. So, we ask, why wouldn’t you just ask the providers to send their standard proposal while focusing the actual questions asked and items listed in the RFP on what is uniquely important to you? Our 12-Item RFP does exactly that. 

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Further, our approach recognizes that a major part of the winnowing and selection process involves developing a personal connection with the people who represent the firms you are considering. Working from our list of recordkeepers provides you with a reasonable assurance that any group of recipients you choose has what you need from the standpoint of capabilities, experience and technology. What will allow you to begin differentiating and narrowing down the list will be understanding what each firm considers to be its primary differentiators, the unique aspects of its service model. Most of that cannot be adequately communicated in a proposal or response to an RFP. You’ll need to take the time to get to know each of the firms and the people who will be working with you.

In working with our clients we tell them that our goal is to ensure that before they meet any of the firms that will be invited to the finalist interviews (see more on this below), they will feel completely confident that every firm they are meeting with can do an excellent job for them. The goal of the finals, therefore, is to identify the one that is the best fit based on the firm’s culture and the personalities of the team involved.   

Response preparation period

Unless you are using an integrated RFP platform to issue your request, to receive and aggregate information and to perform your analysis, you will want to allow about four (4) weeks from the date you issue the RFP to the date responses are due. 

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Ed Lynch is founder and CEO of FPG. He has worked with ERISA-qualified plan sponsors and designated fiduciaries in most aspects of plan development and maintenance since the early 1980s. Ed founded FPG with the mission to be a leader in the field of employee benefits and the most trusted source of information and evaluation in the retirement plan industry.