Managing a 401(k) plan requires a lot of knowledge, expertise, and is extremely time consuming. It not only involves administration and reporting, but also managing the investment alternatives. Deciding which investments funds to include in the investment menu for plan participants is a nightmare for many plan sponsors. Most of them get burned out here.
Fortunately, as a plan sponsor, you don’t have to be an expert in investments or any other specific area of plan management. It would be imprudent and fraught with troubles to act based on your limited knowledge. What would be prudent, though, is to delegate your responsibility to other professionals that have the skills, expertise, and diligence to perform these daunting tasks. Certain provisions of ERISA are specifically designed to limit your fiduciary responsibility by taking advantage of “safe harbors.”
Unfortunately, many plan sponsors are not always aware of their fiduciary duties and responsibilities. First, even though fiduciary responsibility can be delegated, it can never be abdicated. What that means is that you, as a plan sponsor, may still be held liable for wrongdoings and fiduciary breaches of service providers that you hire. Second, the process of selecting a service provider whom you will be delegating part of your fiduciary responsibility to is a fiduciary process in itself. If you don’t have a reasonable and prudent selection process in place, a spur of the moment decision can result in a fiduciary breach.
In order to fulfill your fiduciary responsibility and minimize the chances of a fiduciary breach when selecting services providers, it is extremely important to have and follow a sound due diligence process.
At the outset, a plan sponsor needs to demonstrate that a fiduciary process was followed. The best way to do that is to have a documented process. For example, under ERISA Section 408(b)(2) covered service providers (providers who expect to receive $1,000 or more in direct or indirect compensation for the provided services) are required to disclose their compensation and acknowledge that they provide services as fiduciaries under ERISA. Hence a plan sponsor is expected to obtain and use this information when selecting service providers. Ignoring any of this information can be classified as a fiduciary breach.
A Request For Proposal
A request for proposal (RFP) is another good way to demonstrate that a prudent selection process was followed. An RFP is a formal process by which a plan sponsor can request and evaluate multiple service providers on an apples-to-apples basis. For example, you can compare service providers by criteria such as experience with employee benefit plans, fees and expenses, open architecture vs proprietary products, compliance oversight, etc.
However, before you go through the RFP, it is essential to know which services your plan really needs. It is common to see plans paying for services that they rarely. This is far from being prudent.
It is worth noting, that while an RFP is the most comprehensive method of comparing and selecting service providers, it is very time consuming and not cost-effective. This could be a problem for small 401(k) plans. A simple market survey could serve as a good alternative. Yes, it may not be as thorough as an RFP, but it will be enough to demonstrate that a prudent selection process was followed. The most important thing is to obtain sufficient information from several providers and compare their experiences, competencies, and costs. Once you’ve taken these steps and documented the process you followed, you can dramatically decrease plan expenses, improve participants’ returns, and significantly reduce the chances of running into a fiduciary breach.
Selection of service providers is not a one-time event. With the plan assets growing, the scope of services will expand as well. That means that you will need to go through the selection process again. How often should you do that? The Department of Labor recommends doing it “periodically,” or every three to five years as good rule of thumb.
Finally, remember when we mentioned that you can delegate your fiduciary responsibility, but never abdicate it? This is as true as ever. Your fiduciary duty is not only to prudently select service providers, but also to monitor them. You have to make sure that services are necessary and consistent with the agreement, and the fees paid are fair and reasonable. If you don’t do that, how can you be sure that the best interests of the plan are honored?