Fred’s Take: Though ERISA requires that plan fiduciaries discharge their duties as a prudent expert, it does not mean that employers have to become experts themselves. They can hire third party experts like record keepers, advisors and TPAs to help. But the process for selecting and monitoring these experts must be conducted through a prudent process. The checklist offered by Eric Doblyen from Employee Fiduciary offers a practical and simple approach to shopping for a 401(k) provider.
Originally Posted by Eric Droblyen
In my experience, 401k providers are like snowflakes – no two are alike. Their services can vary dramatically in breadth, depth and price. This variability can make it difficult for small business 401k fiduciaries to select providers with services that match their plan’s needs at a reasonable price.
That’s a problem. 401k plans should not pay for superfluous services participants won’t use. Excess services can be expensive, dragging down participant returns unnecessarily. When this happens, personal liability for 401k fiduciaries can result.
To help 401k fiduciaries select the best service provider(s) for their plan, I recommend a 3 step process:
- Understand the services that compose a 401k plan
- Determine which of these services require professional assistance to deliver
- Compare 3 or more 401k service providers
I discuss the first two steps in depth in my article Selecting 401k Service Providers: Determine the Professional Help You Need Before You Shop. For the third step, I recommend 401k fiduciaries develop a checklist that compares three provider attributes:
- Competence
- Value-added services
- Fees
Below is a sample checklist for plan administration services. If you are a 401k fiduciary, you can use this sample as a basis for your own checklist – adding or deleting the variables you want to compare.
Plan Administration Services Offered
Before you start comparing 401k providers, you should first confirm each provider offers all three of the basic administration services every 401k plan needs – asset custody, participant recordkeeping and third-party administration (TPA).
Many providers do not offer all three services. Instead, they partner with one (or even two) other companies to deliver all three services. When this is the case, evaluate the different companies as one provider when comparing services.
A. Competence
According to the Department of Labor (DOL), “selecting competent service providers is one of the most important responsibilities of a plan sponsor.” To evaluate provider competence, I recommend the comparison of 4 objective criteria – experience, growth, risk mitigation and service standards. Client referrals from each provider should also be requested.
B. Value-added services
When comparing service providers, it’s important for 401k fiduciaries to separate commodity from “value-added” services. 401k fiduciaries should pay as little as possible for commodity services, but may pay extra for value-added services.
C. Fees
One of the most important 401k fiduciary responsibilities is paying only reasonable expenses from plan assets. One way to prove 401k fee reasonableness is to compare provider fees. Unfortunately, these comparisons can be difficult given the numerous ways 401k providers can be paid today – some are paid directly by employer invoice or participant deduction while others are paid indirectly from plan investments. To normalize these differences, I recommend 401k fiduciaries sum all administration fees, regardless of their source, into a single all-in fee and then compare that fee between providers.
401k fees are extremely important, but they shouldn’t be the only consideration when selecting between service providers – the value of any service differences should be weighed.
Feel good about your choice!
Too many 401k fiduciaries shop for service providers backwards – they start shopping before they understand their options. When fiduciaries don’t know their options, it can be easy for 401k providers to sell overpriced or unnecessary services to them due to an asymmetrical informationadvantage. When this happens, personal liability for 401k fiduciaries can result. 401k fiduciaries should know their options before they start shopping.
Selecting competent 401k service providers does not need to be overwhelming – a prudent selection process can be completed in just 3 steps.
(For a complete checklist, go to Employee Fiduciary)
