401(k) recordkeeper due diligence: it’s not just about fees

A defined contribution plan is a machine with many parts: plan design, recordkeeping administration, plan investment advice, participant advice, and compliance. And each part requires attention from an expert.

401(k) plan management: bring in the experts

Often, these experts are independent providers, such as a recordkeeper, a plan design consultant, or an investment advisor; sometimes, fiduciaries divide responsibilities among more than two providers.

There’s no one right structure for supporting a plan. How you choose experts depends on your goals, investments, other plan issues, needs, and level of comfort with design.

But there is a correct process, and that process should be grounded in the fiduciary duties imposed by the Employee Retirement Income Security Act of 1974 (ERISA), which include not only prudent service provider selection, but thoughtful continuous monitoring as well.

There are some best practices you may follow to help you develop, implement, and manage a prudent process for selecting and monitoring a recordkeeper, as we describe them here. As with managing other areas of your fiduciary duties, documenting your decision-making process is vital. 

Process is key for retirement plan sponsors

Process point 1: establish clear selection criteria

It’s just common sense—you have to know what you’re looking for to make good choices. To select and monitor recordkeepers effectively, you should establish clear criteria for hiring them. As part of your selection process, be sure to review the company’s: 

  • experience with plans similar to yours in size and makeup, based on performance and benchmarked results;
  • credentials, including education, certifications, and licenses;
  • level of service and support;
  • competitiveness of fees for the level of service; and
  • references and reputation.

Notice that fees are one among many considerations. The cheapest provider may not be best. Consider the appropriateness of fees relative to services provided and experience with plans and participants like yours.

Process point 2: know what’s required under ERISA Section 408(b)(2)

ERISA Section 408(b)(2) mandates that recordkeepers provide prospective clients with written disclosures about their services, compensation, and fiduciary status.

This requirement exists because you can’t assess the reasonableness of fees without a clear explanation of services, costs, and potential conflicts of interest.

Failure to review Section 408(b)(2) disclosures may constitute a prohibited transaction rule violation by the plan sponsor. If you’re unsure whether the disclosures provided to you are complete, consult an ERISA counsel.  

Process point 3: follow a documented monitoring process

Marketplace conditions change. Your plan and participants also change. As a result, your recordkeeper should be reevaluated periodically.

Monitoring your service provider is just as important as selecting one. As such, a fiduciary must follow a prudent, informed, and clearly documented monitoring process. 

To do this effectively, establish written criteria for evaluating the continued suitability of a service provider. Benchmarking your recordkeeper to its peers in relevant areas, tracking your plan’s health, and reviewing the plan’s fees are well-established ways of assessing suitability. 

Plan health benchmarks might include: participation rates, contribution amounts, loans and withdrawals, investment option usage, retirement readiness.

Reviewing these measures, tracking their history, and comparing your plan against others may help you determine if your recordkeeper is improving participants’ retirement readiness.

Recordkeeping fees should also be compared against those associated with similar plans to ensure continued reasonableness relative to services provided. 

ERISA is about process 

A prudent fiduciary should establish and follow informed processes when selecting and monitoring a retirement plan recordkeeper—and carefully document all decisions. 

The guidelines here, while helpful, do not constitute legal advice and should not be solely relied on. To be certain that you are complying with your fiduciary responsibilities, follow up with your legal counsel.

For more information, visit the U.S. Department of Labor’s dedicated fiduciary website at https://www.dol.gov/general/topic/retirement/fiduciaryresp.

The content of this presentation is for general information only and is believed to be accurate and reliable as of the presentation date, but may be subject to change. It is not intended to provide investment, tax, or legal advice. Please consult your own independent advisor as to any investment, tax, or legal statements made here.


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