The scenario

We encounter, not infrequently, situations like this: A plan sponsor has no clear understanding of the total fees their 401(k) recordkeeper and service providers are collecting. There are no internal controls to monitor the provider’s product quality or operations. Instead, the sponsor relies on the provider to self-report on these matters.

The contract was signed without legal review. When we review it afterward, costs aren’t clearly defined—and are often higher than the sponsor thought. The scope of the provider’s responsibility is restricted in ways that unknowingly shift nearly all liability back to the sponsor, despite marketing assurances to the contrary.

How did they select this provider? A salesman who handled their health insurance was a friend of a senior manager. The company had a positive relationship with the firm. And frankly, leadership views employee benefits administration as a burden and distraction from core business.

Now imagine if one of your employees made a comparable decision about your manufacturing facility, real estate acquisition, or IT infrastructure—with the same level of rigor. After the yelling stopped, they’d likely be looking for a new job.

The Iront

Retirement plan decisions are often actually more fraught with risk than other commercial or administrative decisions. Yet they receive less scrutiny. ERISA imposes the highest fiduciary standards known to law. Personal and corporate financial liability can approximate the total assets in the plan itself.

Most organizations lack a formal and defensible process for the selection and monitoring of retirement plan service providers. This is often not due to negligence or willful misconduct. It’s simply a lack of knowledge or recognition. But the consequences are real: plan participants pay higher-than-necessary fees, and plan fiduciaries face significant risk exposure in the eyes of federal regulators and the courts.

What’s Inside This Guide

This article—published in the Journal of Pension Benefits—provides a framework for sound decision-making around service provider selection. It covers:

The Legal Foundation

  • ERISA’s fiduciary standards and why “care, skill, prudence and diligence” is held to an expert standard—whether you have expertise or not
  • The fallacy of delegation: why hiring an expert doesn’t relieve you of liability for their performance
  • How plan fiduciaries can be held personally liable for breaches committed by other fiduciaries to whom they delegated responsibility

The Common Mistakes

  • Selecting providers based on personal relationships or convenience
  • Hiring your health insurance broker to administer your 401(k) (expertise in one area doesn’t transfer)
  • Using the retirement plan as leverage to secure favorable banking terms or loan rates (a prohibited transaction)
  • Relying on nonfiduciary service providers who operate under “suitability” standards instead of fiduciary standards

The Selection Framework

  • Step-by-step process for evaluating your current plan and identifying what needs to improve
  • How to conduct a detailed accounting of all direct and indirect fees (and what “reasonable” actually means)
  • Three models for allocating responsibility and liability—and how to choose
  • How to issue an RFP, conduct interviews, and identify which candidates are willing to act as fiduciaries
  • What an ERISA attorney should negotiate in the contract (scope, fees, fiduciary status, indemnification)
  • How to negotiate fees—and why you should be cautious of unusually low proposals
  • The problem with revenue sharing and why mutual fund expense ratios matter

Ongoing Obligations

  • Why signing the contract doesn’t end your responsibility
  • How to monitor service providers to ensure participant interests are being served