Sunday, May 17, 2015

Evaluating Plan Service Providers

Nicholas Zaiko, CIMA®
Investment Consultant
Bridgebay Financial, Inc.

Selecting a service provider for a 401(k), 403(b), or 457 retirement plan is one of the most crucial decisions that an employer and plan fiduciary can make in determining the retirement outcomes for its employees.  

The Department of Labor (DOL) has indicated that a plan sponsor has a fiduciary duty to establish and follow a formal review process at reasonable intervals, generally 3-5 years, to ensure the caliber of the selected provider. A client service focused organization will tailor its services to the plan sponsor's needs and have an understanding of the key requirements of the plan sponsor.

The process starts with the Request For Proposal (RFP) which should address the provider’s services, expertise, client commitment and compliance experience at a reasonable cost.  The RFP provides a strong foundation for selection but is not the only factor.  The in-person finalist presentations should highlight the relationship services.

Provider Selection Sub-Committee
It is good practice, in order to facilitate the service provider search, for the plan sponsor to establish a Selection Committee with a range of members with different areas of expertise such as payroll, employee benefits, legal, compliance, investments/finance and technology/systems.  Each member should be responsible for evaluating the provider’s abilities in their respective key areas. 

Use of an Outside Retirement Plan Expert
Many plan sponsors engage an outside consultant to guide and advise them through a methodical process that is well-documented and clearly illustrates the reasons for the decisions made.  The consultant's role is to guide the plan sponsor in establishing goals and objectives, success metrics, and targeting performance standards. The plan consultant can screen candidates, customize the RFP to the plan sponsors needs, conduct the provider search, analyze or score the results and lead the finalists’ presentations.

The RFP consultant will pre-screen candidates based on specific plan sponsor requirements or a set of minimal capabilities.  A retirement plan consultant may expedite the selection process by searching its database of service providers to identify those candidates that offer services that best fit the particular plan's needs.  

The consultant can guide plan sponsors through a large universe of competent service providers and qualify a few candidates that are a strong match for the plan sponsor and the participants.  Service providers have different target markets, service levels and areas of expertise.  The RFP consultant can differentiate among providers and permit the plan sponsor to select the service provider that best meets their specific requirements.

Preparation of the RFP questions is critical for efficiency and thoroughness to prevent receiving vague responses.  Certain questions may serve as differentiators.  The consultant's expertise in understanding the nuances of different levels of service, identifying potential conflicts of interest and understanding the benefits or limitations of certain providers can be extremely valuable to a plan sponsor.  A key benefit in using an expert is that the consultant can provide invaluable insights from having worked directly with the numerous providers under consideration.

One of the best ways for a consultant to present the results of their evaluations is to provide side-by-side analysis and a scoring system to enable the plan sponsor to identify and understand the finalists they would want to interview.