Evaluating DC Providers and Advisors and Avoiding Conflicts

Evaluating DC providers Evaluating DC providers and advisors while avoiding conflicts can be a slippery slope at times. Companies and organizations sponsoring a defined contribution (DC) plan like a 401k or 403b are held to the very high standard of being a “prudent expert” which is why they usually hire third parties like advisors, record keepers and TPAs. So one of the most important activities is to make sure that the partners are competent and are fulfilling their obligations properly without conflicts of interest. An experienced DC advisory firms reviews best practices in reviewing providers and advisors while avoiding conflicts.

The initial analysis in hiring DC providers and advisors include:

  1. Are the services necessary?
  2. Is the person or company competent?
  3. Are the fees reasonable?

These steps need to be documented and verified. Questions you might ask in a formal RFP or a more informal process include:

  • Do they have the personnel and infrastructure to handle your plan?
  • Do they have the necessary experience?
  • Are they capable of working with plans of your size?
  • Are they accustomed to working with organizations like yours?
  • Have they been involved in litigation or had any adverse regulatory enforcement actions?
  • Do their references check out?
  • What is their financial condition?
  • Do they carry insurance that protects your plan and you if they make a mistake or do something wrong?
  • How do their fees compare with others offering the same service(s)?

A TPA recently posted an article outlining two easy steps to evaluate record keepers.

Evaluating an advisor can be the most troublesome exercise because advisors usually help plan sponsors evaluate providers and investments but are conflicted when reviewing themselves or competitors. 401kTV has teamed up with InHub, an independent third party, to help plans sponsors through this process. The new DOL rule was created to avoid conflicts of interest by anyone providing advice and guidance including advisors, broker dealers and providers serving DC plans and IRAs

Bundling services is common but it can make the evaluation process more difficult because each service needs to be reviewed independently. One potential red flag is whether a record keeper can increase revenue through the investments on their platform without the consent of the plan fiduciary. Another is whether the provider receives more compensation from the use of proprietary funds. In a recently filed lawsuit, participants in a bank’s plan sued over the use of what was alleged to be inappropriate proprietary bank funds.

The hiring and ongoing review of independent providers and advisors can seem overwhelming to busy HR and finance professionals running their DC plan but get these steps right, while staying abreast of new laws and best practice, and everything becomes easier. Remember to benchmark fees and services annually and conduct formal RFPs every three to five years depending on the plan size or changes within the company.

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