RFP Process for Bundled Service Provider

Nicholas Zaiko, CIMA®

Investment Consultant

Bridgebay Financial, Inc.

www.bridgebay.com

It is a good fiduciary practice to conduct a periodic review of the DC plan service provider to ensure that the participant assets are well-protected and tracked accurately.  This should include a review of financials and SSAE 16 (internal control audits) annually.  If the plan service provider has not been reviewed in a long period of time, or the plan has grown or changed dramatically in the number of participants, need for additional services and asset size, it is a good fiduciary practice to conduct a due diligence review which may best be performed through a request for proposal (RFP) for plan services. 

Define the Objectives of the RFP

The detail and customization of the RFP will be determined by the key objectives of the RFP.  Some typical reasons for sending out a RFP include:
  

1)   Benchmarking to compare the current provider's fees and services in response to ERISA 408(b)(2)

2)   Improving plan efficiency and delivery of services to the plan and its participants

3)   Streamlining the administration of the plan through improved technology and automation

4)   Expanding or enhancing the investment choices, advice, asset allocation solutions

5)   Improving participant communications, education and participation rates

6)   Seeking a change in provider's relationship team, response time and expertise

Establish Criteria

The plan sponsor should establish specific metrics to evaluate the providers to ensure that the key issues are addressed.  Any specific restrictions or contract stipulations that are non-starters should be identified at the onset.  When crafting the RFP, it is important for a plan sponsor to identify their organization's unique priorities, objectives and preferences.  Some criteria may include conversion timeline, minimum performance standards, fees, call center and on-line participant access, investment options and organizational flexibility.  A client service-oriented provider will be willing  and able to tailor its services to the plan sponsor's specific needs.

Plan Information

Make the responses specific and relevant to your plan by providing sufficient information and data about the plan features, asset mix, cash flows, employee demographics, and current investment line-up.  Include any new services desired and their importance to the overall decision.

Evaluate the RFP Responses

Quantitative criteria include sponsor and participant service measures, plan use data, fund performance, expenses and timing.  These tend to be easy to compare and understand, though they tell only a fraction of the provider’s full story.  Financial stability in the wake of the financial crisis is critical to continuously offering high quality plan services.  Financial strength ensures high quality personnel, up-to-date enhancements to systems and improvements in compliance and delivery of participant services.

The Committee should be clear on what aspects of the RFP are critical to the selection of a qualified service provider based on the criteria established prior to issuing the RFP.  Developing a scorecard is a helpful tool when evaluating RFP responses and will streamline the process.  The evaluation should be presented to the committee and finalists selected based on the results.

Education

Education should be accessible through multiple channels such as paper, webinar, in-person, on-demand information, and live representatives.  Call centers need qualified, expert representative that are responsive to participant requests.  There should be a broad menu of education media including user-friendly on-line tools, retirement calculators, retirement income education, publications, newsletters, investment information, on-demand educational tools and in-person seminars.  Beware of marketing material masquerading as investment education.

Compliance

Compliance expertise has taken a central role in this time of increased regulations. Providers should demonstrate specific cases where they provided solutions to plan sponsors to meet new regulatory requirements.  Strong providers will have updated technological tools, operational procedures and legal expertise that ensure the plan is compliant with the changing regulatory landscape.  Plan design recommendations from providers are also very useful in a rapidly evolving regulatory environment.  Plan sponsors should understand the provider's compliance resolution process and how proactive they are in ensuring the plan remains in compliance.

Finals Presentations

Once the finalists have been determined, they should be notified and sent an agenda for the presenters to follow.  The absence of a detailed agenda will allow the provider with the best showmanship, and not necessarily the best product, to win the business. The key client service and relationship personnel that will actually be handling the account on a day-to-day basis should be present at the finals presentation. The finalist in-person presentations should highlight the relationship services. Using a common agenda with each finalist will also make is easier to make truly apples-to-apples comparisons.  The way some firms answer certain questions may actually point out deficiencies in other firms.  A knowledgeable and experienced retirement plan consultant can highlight these differences and explain their implications on the plan sponsor's plan.

Evaluating Plan Service Providers

Nicholas Zaiko, CIMA®

Investment Consultant

Bridgebay Financial, Inc.

www.bridgebay.com

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.  

Investment Oversight Best Practices

Nicholas Zaiko

Investment Consultant

Bridgebay Financial, Inc.

www.bridgebay.com

The employer-sponsored defined contribution (DC) plan now represents the primary retirement savings vehicle for most employees.  The increased size, complexity and recent 401(k) plan litigation, demands greater scrutiny of the plan's investment options in addition to enhanced administrative oversight.  These issues are not limited to the 401(k) plans but also 403(b) plans that are under ERISA and DoL.   

Revisiting the Oversight Role

The increased significance of the role of the DC plan now demands additional expert focus on the investment options offered to the participants.  The oversight structure should also adapt to consider the changing relationship between the plan sponsor and the service provider as assets in the DC plan grow.  Additional services may be required as the plan grows and the service providers' ability to deliver those services in a cost-effective way must be evaluated.  Failing to achieve enhanced services or reduced fees as a DC plan grows may result in an unintentional fiduciary breach on behalf of the plan sponsor as recent litigation has shown.  The sponsor may also fail to meet its fiduciary duty to participants if the participation rates, investment selection and education programs are not closely monitored and maintained.

Investment Oversight

The most effective way to increase investment oversight is to include members of the treasury or finance departments in the plan oversight committee.  This is an evolving trend that is spreading throughout the DC market.  Since traditional pension plans or defined benefit (DB) plans directly impact the financial statements, the CFO or Treasurer are typically heavily involved in both the administration and investments in those plans.  In contrast, the DC plan has had minimal impact on the employer's income statement and has historically been overlooked by the treasury group.  Recent litigation on fees and fiduciary breaches have demonstrated that DC plans can have an adverse monetary impact the employer's finances.    Employing the same robust oversight historically reserved for the DB plan to the DC plan will greatly enhance fiduciary compliance and minimize risk.  

As plan assets grow, plan sponsors may consider retaining the services of an independent, retirement plan consultant that has the benefit of working with many different plan providers, investment funds/managers and plan sponsors.  Many bundled 401(k) plans have relied on the affiliated investment consultant provided by the recordkeeper that is an employee of the recordkeeper's parent organization.  Periodically, a plan sponsor should seek a deep-dive review of the investment recommendations by an independent third-party advisor to ensure that the investment line-up is best in class with reasonable fees.

The expertise of a retirement plan advisor will assist the plan sponsor in ensuring that plan fees and services are competitive with other plan providers.  An independent consultant can also point out any deficiencies in the administration of and the investments in the plan. 

The Plan Committee

Plan sponsors should pay close attention to the size and composition of their investment committee.  The cornerstone of an effective committee is ensuring that all members represent experts in their particular field of focus.  The best committees are well rounded, drawing from several different departments.  Each member should focus on a particular area of the plan which aligns with their particular expertise and take the lead in major decisions.  For example, the ERISA attorney should have greater direct input and authority on providing fiduciary and compliance advice.  Similarly, the Treasury professional should focus on the investments, leaving legal compliance issues to the ERISA attorney.  The administrative requirements of the plan should be provided by the benefits manager and Human Resources representative.  Additionally, an advocate for the participants and employees should also provide input to the committee.  Well defined roles and segregation of duties is crucial for an efficient and effective oversight committee.

The committee should be sufficiently small as to avoid getting bogged down in procedure and scheduling conflicts and allow sufficient time for proper oversight by each member.  Exceedingly large committees may have problems assembling enough members at any one meeting in order to establish a quorum and thus inadvertently delay crucial plan decisions. 

Investment vs. Administrative Decisions

Investment and administrative timelines tend to differ dramatically and can often conflict.  Many challenges arise when trying to fit investment decisions into administrative timelines.  The conflict may become so great, that investment decisions end up being made based on administrative pressures rather than investment priorities.  These types of decisions can potentially represent breaches of the plan sponsor's fiduciary duty to the plan participants.  For example, leaving an underperforming fund in the plan because of administrative restrictions after the committee has decided to remove or replace the fund may open the door to fiduciary liability.  On the flipside, the plan investment policy should not be written in such a way as to rigidly trigger automatic action regarding a fund.  The policy should reflect a structure of monitoring that involves the evaluation of numerous important factors.  Any action taken regarding a fund should be reviewed and documented by the committee.

Investment Review Process

A well-designed and methodical investment review and search process is the hallmark of the top institutional DC plans.  Any changes made to the plan should be done so in a well thought out approach which takes into account investment considerations.  While administrative considerations are omnipresent, they should simply inform but never interfere with critical investment decisions.  There are some steps that can be taken to reduce administrative burdens such as utilizing a multi-manager framework and using asset class specific funds.  This makes it significantly easier to simply replace an underperforming fund with a similar fund with better performance.  The best plan sponsors also have an established search process in case a fund change is required at any time, rather than relying on a pre-determined periodic review.  This allows the committee to act swiftly in the case of an unexpected event.  Though periodic review is important, searches should be conducted in response to external events and not simply be restricted by the calendar.

Conclusion

Now rivaling the traditional pension or defined benefit (DB) market in scale, DC plans have taken center stage in employees' retirement future.  As such, professional, expert scrutiny of the investments offered to plan participants is becoming increasingly important.  The plan committee composition and size are crucial to providing diligent and effective oversight in order to protect against fiduciary risk.  Engaging the broad knowledge and specific expertise of an independent investment consultant to share the burden of co-fiduciary status affords the sponsor further protection and market insight.   A detailed and methodical review and search methodology, coupled with a comprehensive pattern of documentation is the one of the best ways to fulfill the sponsor's fiduciary duties to the plan participants.