Best Practices in Benchmarking 403(b) Plans

Barbara Williams, CFA

Managing Director

Bridgebay Financial, Inc.

www.bridgebay.com

This article addresses some of the best practices in benchmarking 403(b) plans as a guide for plan sponsors.

Periodic benchmarking of your 403(b) plan is a normal due diligence process that should be conducted by an independent retirement plan advisor or consultant that is well-informed and has experience working with multiple service providers.  This broad experience allows the third-party advisor to properly benchmark your plan against other plans and service providers in the defined contribution market, namely, ERISA-covered and non-ERISA plans. 

The Department of Labor (DoL) has signaled that such a review should be conducted every 3-5 years.  Plan sponsors should conduct a request for information (RFI) through an independent retirement plan consultant to benchmark plan services, fees and administration as a best-practice and document good fiduciary practices.  Refreshing plan features and services assists nonprofit retirement plan sponsors who are dedicated to their participants' ability to have positive retirement outcomes.

Ideally, the independent retirement plan advisor conducting the benchmarking study should not be associated or affiliated with the current or prospective plan provider.  Also, the advisor should not have any conflict of interest or be able to benefit financially from selecting or recommending any specific provider. 

A critical element of the benchmarking process is proper and thorough documentation.  The evaluation criteria must be specifically defined in order to unequivocally demonstrate that an impartial, balanced, and comprehensive review was conducted and that the final decision is rational, defensible and free of any potential conflicts of interest.  Such documentation will definitively exhibit the prudent process for the DoL and demonstrate that the chosen solution was for the benefit of the plan participants. 

The due diligence process should incorporate a review of the recordkeeper's financial strength, delivery of services, plan compliance, reporting services, plan sponsor services, participant services including education, quality of investment choices and fees.  Fortunately, recently mandated disclosure requirements now enable the plan sponsor to receive better information and greater transparency concerning services and total costs.

Investments

On the investment side, many plans rely on the recordkeeper's affiliated investment team to provide investment reviews quarterly.  From a fiduciary perspective, it is also a best-practice to conduct a deep-dive of the investments using an independent third-party investment consultant at least annually to provide an impartial review of the quality, diversification and cost of the investments.  By conducting an annual deep benchmarking review of the plan by an independent consultant the sponsor can still benefit from the recordkeeper's quarterly investment input while also enhancing fund, plan and provider oversight.  This third-party perspective is a tremendous fiduciary benefit that the plan recordkeeper simply cannot provide.

Multiple Providers

When compared to 401(k) plans and other defined contribution plans, 403(b) plans offer many more investment options to their participants on average.  Typically, when multiple vendors are used, many of the investment options are redundant and may not necessarily be best-in-class.  This redundancy in investment options can lead to participant confusion, inertia, poor asset allocation and higher costs for participants.  The use of multiple providers can present complications when trying to evaluate a particular 403(b) plan with regards to its peers. 

Nonprofit plan sponsors with multiple providers with different investments and embedded costs may require retaining an experienced retirement plan consultant to streamline the plan.  Many 403(b) sponsors find it advantageous to move to a single provider with an efficient cost structure and investment offerings that best benefits the participants. 

Understanding Plan Fees

The implementation of 408(b)2 in 2012 represented a major step in assisting plan sponsors in understanding plan fees, re-negotiating those fees and gaining a better understanding of the costs associated with the services being provided.  In many cases, providers have updated the services and expanded their platforms to better serve their clients in an effort to retain existing business.  All of these developments are positive for the discerning 403(b) plan sponsor.

Enhancing Plan Features

There are numerous features in plan design that sponsors can employ to increase the success of their plan and participants' retirement outcomes.  Some key design features include auto-enrollment of current and new employees, auto-deferral, auto-deferral increase, and selection of a Qualified Default Investment Alternative (QDIA).  Providing enhanced participant information on projected retirement savings and income replacement by retirement age are also important participant incentives to increase the success of the 403(b) plan.

The current trend is to de-emphasize participant education and focus on plan design features that optimize participation, asset allocation, and maximize deferrals.

Planning for the Future

When using independent third-party consultants, it is important that the retirement plan adviser have specific experience in an ERISA environment, even if the 403(b) plan is non-ERISA.  This experience and background will ensure that the plan sponsor is attaining the highest standard of prudent care and is implementing best practices.  The advisor should be able to draw from the practices of a wide range of providers so that if the plan services are determined to be limited, outdated, or overpriced, the advisor will be able to recommend better solutions.

Retirement plans offered at different nonprofit organizations are at different stages of development.  Advisors that are familiar with more evolved retirement plans can "see the future" and are able to lay out a blueprint for success.

Many qualified retirement plan advisors that have historically advised 401(k) plans can contribute significantly to 403(b) plan sponsors.  Their expertise and fiduciary knowledge gained from operating in a ERISA world can benefit nonprofit organizations that are now progressing into an ERISA fiduciary environment.  An advisor well-versed in ERISA standards can effectively apply that same level of due diligence, prudence and fiduciary standards to the 403(b) plan of a nonprofit organization. 

Conclusion

Fiduciary oversight of a 403(b) plan has become a challenging role for many plan sponsors, especially if their administrative responsibilities are still burdened with multiple vendors.  Periodic plan benchmarking is a critical function for all plan fiduciaries, regardless of the retirement plan type or size.  Benchmarking helps plan sponsors upgrade plan services, plan design and participant services at a competitive price.

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.

Service Provider Due Diligence

Nicholas Zaiko, CIMA®

Investment Consultant

Bridgebay Financial, Inc.

www.bridgebay.com

Selecting and effectively monitoring defined contribution plan service providers is an essential fiduciary duty of the plan sponsor which influences retirement outcomes for its employees.  The plan sponsor or Committee overseeing the defined contribution plan shares this responsibility for the prudent management of the plan for the benefit of the participants.

Fiduciary Reasons for Conducting a Provider RFP

In the ERISA Section 408(b)(2) fee disclosure rules, the Department of Labor (DOL) assumes that a prudent plan sponsor has a fiduciary duty to establish and follow a formal review process at reasonable intervals, generally three to five years, to ensure the caliber of the selected DC provider and that the services are being delivered at a "reasonable" cost.  Typically, a plan sponsor can conduct this due diligence review by issuing a service provider RFP.

Types of Service Providers

There are a full range of DC plan service providers that are either independent or affiliated with different types of institutions that include:  TPAs (third party administrators) or independent recordkeepers, mutual fund companies, insurance companies, banks, and brokerage firms.

Bundled or Open Architecture 

In order to properly operate a qualified DC plan, an array of services are necessary.  Those services include recordkeeping administration, trustee/custodian services, compliance testing, investments, legal update of plan documents, government reporting and participant education.  Bundled service providers offer the full spectrum of services necessary to operate a qualified plan under one contractual arrangement.  A bundled provider includes plan administration, recordkeeping, trustee, legal, investments, participant communication and education. Defined contribution plans, such as 401(k), 403(b) and 457, that are open architecture may use multiple service providers that perform each role.  In such a situation, the plan sponsor would issue RFPs for each of the various services.

Multi-Purpose RFP

A well-documented due diligence review enables plan sponsors to fulfill their fiduciary duty to prudently monitor their service plan providers.  A multi-purpose RFP covers the services of key providers necessary to operate a 401(k) or 403(b) retirement plan.  The design of the questionnaire is the first step in the evaluation process when benchmarking providers.

The process starts with the Request For Proposal (RFP) and should elicit information about the provider’s services, expertise, client commitment and compliance experience with clearly detailed costs.

Independent Benchmarking

The RFP process can be a benchmarking tool to assess the quality of the plan’s services, potential upgrades to the plan and serve as a resource to evaluate the reasonableness of plan fees.  Periodic, unbiased benchmarking documents the plan sponsor's fiduciary process to monitor the quality of plan services and fees.