How to use appendices in your retirement plan service agreement

What goes into a service agreement?

Service agreements should accomplish many things—establish roles and responsibilities, protect you from potential litigation, be easy to follow for all, and more. But, like many legal contracts, they contain language that isn’t easily understood and can be hard to digest. You can help clarify the content by adding a table of contents to help navigate, including clear section headings to separate topics, or using appendices written in layman’s terms, to name a few options.

Most service agreements will include the following sections, among others, in some capacity—let’s talk about why you may consider having an appendix for each as well.

• Services provided
• Fiduciary status and liability
• Compensation

And as always, you’ll want to consult with your legal professional to ensure all binding legal documents meet your needs.

Appendix one: your services

Which services will you provide the plan sponsor and its participants? Will they happen once or be ongoing? Answers to these two questions can help you avoid unnecessary conflict and confusion with your clients.

Consider specifying the following service categories—financial professionals take on various levels of involvement, so detail is important:

• Provider relationships—Will you be the go between for the client and other providers, such as the plan recordkeeper or third-party administrator (TPA)?
• Benchmarking services—How will you monitor the performance of the plan sponsor’s providers, perform periodic requests for proposals, and benchmark fees?
• Plan design—Do you plan to share ideas to optimize plan design, such as using safe harbor or automatic enrollment/increase features? 
• Investment management and selection—Are you taking on investment selection and monitoring responsibilities? If you are, then you’ll want to work with your client to create an investment policy statement and criteria for making changes.
• Employee education—Is participant education part of your service offering? It can be a source of leads for your personal financial planning business and create greater engagement in their retirement plan. Outline your commitment to the plan sponsor’s employees.

Specify how frequently you’ll provide an update to the plan sponsor for each service. Design a schedule or calendar of events—it can be helpful to stay organized and aligned with others involved. Dedicate a separate section, page, or appendix for an individual service category if it warrants it.

Appendix two: retirement plan fiduciary status

Being a retirement plan fiduciary is a responsibility that shouldn’t be entered into lightly, and it’s an important role to clearly understand. Fiduciary duties are often shared among the plan sponsor, financial professional, and others involved in running the plan. Some plan sponsors hire a provider for the sole purpose of taking on certain fiduciary liability, such as investment management.

Define the specific type of ERISA fiduciary you’ll be, if any. Some types of fiduciaries you may act as include:

• 3(16) plan administrator—Manage day-to-day operational tasks of the plan.
• 3(21) investment advisors—Provide investment recommendations to the plan sponsor, but the plan sponsor retains final decision-making. 
• 3(38) investment managers—Take on full discretion over investment selection, monitoring, and changes. 

Appendix three: compensation

Continued fee compression in the retirement industry has emphasized the importance of compensation transparency and clarity. Be detailed since you can structure your fees in several ways:

• One-time versus ongoing fees
• Frequency of receiving payments
• Asset-based, per participant, and flat dollar fees
• Minimums and maximums
• Tiered schedules for varying asset or participant levels

Dedicating a page of the agreement or appendix to spell out the specifics of your compensation can help create transparency—you don’t want to lose revenue due to ambiguity.

Additional ideas to think about

Here are a few other topics that may warrant detailing in a dedicated section or an appendix.

General plan information

Detail primary plan information—plan name, address, tax ID, company type, and more. It can serve as the trusted source for this information, knowing that changes to the contents result in an agreement amendment. This plan information is needed for Form 5500 and other filings each year.

Agreement term length

Include a term length as part of your agreement, even if you have no intention of breaking it in the foreseeable future. Two reasons to consider an agreement expiration:

1. A lot can change in a short amount of time, evidenced by the COVID-19 pandemic. Allow yourself an exit if you need it.
2. Fee compression and negotiations can be ongoing without guardrails. Lock in your compensation for a period before you’re forced back to the negotiating table.

Investment management

Expand on your investment management practices if this is a service you offer plan sponsors. Lawsuits in the retirement industry related to investment selection, excessive fees, and similar have continued to grow in recent years. Protect yourself with a well-defined process for choosing diversified and competitive investments for participants.

Start your relationship with mutual alignment

You know you’ve created an easy-to-understand service agreement if the plan sponsor can read it and confidently understand the following:

• What’s my financial professional going to do for me, and how often?
• Which fiduciary liabilities have I offloaded to them?
• How much am I paying them?

Clearly separate these topics or take advantage of appendices to spell out the meaning of the agreement in a way anyone can understand and thoughtfully agree on.