Conducting a Recordkeeping Vendor Search: Benefits

Conducting a vendor search can be a detail-laden, time-intensive process that takes up to six months to complete. If the vendor search results in the selection of a new vendor, the conversion can disrupt the norm and create anxiety. Why would a plan sponsor volunteer to do this? The benefits of conducting a vendor search substantially outweigh the potential short-term inconveniences. This two-part series begins with a look at why conducting a vendor search may be necessary to satisfy several of a plan sponsor's fiduciary duties under ERISA, followed by a discussion of the numerous practical benefits that result from a thorough vendor search.

Fulfillment of Certain Fiduciary Duties

ERISA governs most conventional retirement plans and mandates that plan sponsors accept and fulfill a relatively high degree of fiduciary responsibility with regard to the plan and its participants. Among the litany of its rules, ERISA either directly or indirectly requires a plan sponsor to perform multiple tasks with regard to the plan's vendors.

Perhaps the headliner among these vendor-related ERISA requirements is the duty to determine if the compensation paid to a "party-in-interest" is reasonable in light of the services being rendered. (ERISA defines parties-in-interest to include the plan’s service providers.) This means that plan sponsors must ensure the reasonableness of any fees charged to the plan considering the services that it receives from its vendors. There is no requirement to select the lowest cost provider, only to document the prudent process used to evaluate the fees in tandem with the services rendered.

By its definition, a determination of reasonableness implies some level of comparative study. In the context of retirement plan vendor fees, determinations of fee reasonableness are often informed by marketplace comparative fee analysis. Retirement plan fee benchmarking studies most typically take one of three paths:

  1. Basic fee benchmarking study
  2. Request for bid
  3. Comprehensive request for proposal

These three paths differ both in the time and effort required to complete as well as the specificity and breadth of the results.

Basic Fee Benchmarking Study

The most basic type of fee benchmarking study looks at general industry data to approximate a fee range that the plan could expect if it solicited bids from vendors at large. The data used to inform such a study is often gathered from industry research institutions to which vendors and other professionals report fee information. Consulting firms that assist plan sponsors with fee benchmarking studies may also keep a database of proprietary information regarding vendor pricing ranges and trends. This very basic benchmarking study does not consider the specific objectives and service requirements of a particular plan.

Request for Bid

Issuing a request for bid to a population of prequalified vendors injects an element of plan specificity and uniqueness into the fee reasonableness determination. The request for bid process incorporates certain plan-specific information as the number of participants, plan asset levels, and plan design information. In summary, the request for bid process entails issuing a request for bid to a defined population of vendors, receiving and analyzing the bid specifications received from vendors in response to the bid request, and comparing the bids received to the current fee structure. In addition to helping them make fee reasonableness determinations, plan sponsors often use the request for bid request-for-bid process to negotiate lower fees with their current vendors.

Request for Proposal

The ERISA-mandated determination of fee reasonableness must also consider the services that are being rendered by the vendor to the plan. Fee benchmarking studies and requests for bids are not designed to probe vendors about how they would address the plan's specific servicing requirements. Therefore, plan sponsors often decide to engage in a more comprehensive vendor search process that is custom-tailored to the circumstances, objectives, and service needs of the particular plan. By undertaking a full-blown vendor search, plan sponsors are able to assess the reasonableness of fees and consider the reasonableness of fees in light of the plan's particular objectives and needs.

The request for proposal process typically involves three phases. During the preparation phase, the plan sponsor typically starts the vendor search process by determining its objectives in conducting the search. Sometimes plan sponsors organize participant focus groups to solicit feedback about current and desired plan services from the participant's perspective. This feedback is then used to help shape the search objectives. Once the search objectives are established, the plan sponsor prequalifies the vendors who will be invited to propose. A thorough vendor prequalification entails a preliminary evaluation of the entire marketplace to arrive at a list of vendors that have the basic capabilities required by the specific plan. This baseline step is important because most vendors have defined their business and service models to suit the needs of certain types and sizes of retirement plans with certain features. For example, a 401(k)-only service provider would not make a good selection for a 403(b) plan sponsor's prequalified vendors list. Other factors, such as the plan sponsor's current relationship with the vendor (if any), the vendor's reputation in the marketplace, the vendor's asset transfer requirements, and the plan sponsor's search objectives, tend to influence the plan sponsor's prequalification decisions. Prequalified vendor lists usually include the current vendor and run six to ten vendors deep.

During the analysis phase of a vendor search, prequalified vendors draft their proposals, which are then carefully reviewed and analyzed with the plan sponsor's search objectives in clear focus. The capabilities and solutions proposed by each vendor are compared head-to-tail across the board. Determining the proposal evaluation criteria and creating a comparative vendor scorecard can help ensure a comprehensive apples-to-apples comparison of the vendors' offerings. Once the proposals are reviewed and compared, the plan sponsor typically selects two to four finalists from among the candidate pool. The finalists represent the proposals that best address the plan's unique objectives and overall circumstances. Finalists are typically given another opportunity to present the highlights of their offering directly to the committee, with the committee able to interact directly with each vendor and to ask specific questions about their proposal. The analysis phase concludes with the selection of the plan's vendor.

The final phase of the vendor search is the conversion phase, which often requires up to three months to complete. During this phase, the plan's investment options lineup is selected, service agreements are negotiated, plan assets and data are transferred to the new vendor, and the plan sponsor's fiduciary duty to determine if the compensation paid to a service provider is reasonable in light of the services being rendered is fulfilled.

Other Benefits

Conducting a vendor search comes with a multitude of benefits beyond the satisfaction of certain fiduciary responsibilities. Several of these additional benefits are highlighted below.

Service and Resource Enhancements

Plan sponsors trust their vendors to perform a myriad of delegated tasks but often wish that the list of delegated tasks could be even longer. The competition created by the vendor search should drive vendors to offer to do more for plan sponsors. Delegating more responsibility to the plan's vendor can substantially relieve the plan sponsor of its administrative burden. Conducting a vendor search also provides plan sponsors with the opportunity to assess and buy newly available products, services, tools, and technology. Plan sponsors that rely on multiple vendors to provide investments and services may find that consolidating to a single vendor results in significant operational efficiency.

Improved Participant Communications and Education

Plan sponsors must operate the plan for the exclusive benefit of participants. Plan sponsors must also ensure that the participants receive the information necessary for them to make informed choices regarding their participation in the plan. Participant education is one of the most important objectives of most plan sponsors because they understand that a well-educated participant is more likely to take the steps necessary to be ready for retirement. New industry studies are constantly reshaping how participant education is strategized, and vendors are adding more participant-centric services to their offerings.

Improved Investment Alternatives

Plan sponsors are required to diversify the investment alternatives available to participants under the plan. Investment products have evolved with the marketplace, and access to open architecture platforms has become more desirable. As a result, new and better investment products and platforms are being offered.

Increased Participation

Usually fed by an improved education program and resources, many plan sponsors find that a vendor search results in a sharply defined education plan. The education plan is designed to increase participation such that more employees decide to enroll, and current participants start contributing more money to the plan. Decreased Cost While ERISA does not require plan sponsors to choose the vendor with the lowest price, plan sponsors and participants often enjoy lower fees as a result of the search process, regardless of whether a new vendor is hired. The vendor search process sparks a level of competition that should result in an improved service package at a lower overall cost.

Increased Employee Satisfaction

When taken together, the aforementioned benefits conspire to create yet another benefit: increased employee satisfaction. Employers often cite employee satisfaction as one of their primary objectives in sponsoring a plan. The vendor search process provides the employer with an opportunity to ensure that participants are receiving allows the employer to ensure that participants receive the best available retirement plan products, services, and resources.

Competition between recordkeepers has led to constant innovation, updates to services, and, often, fee compression. Conducting a vendor search approximately every five to seven helps the plan sponsor satisfy these ongoing responsibilities.

For more information and the best practices to conduct a vendor search, download our full guide here and watch for part two of our blog coming soon.

Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational 
purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are 
not guaranteed. Multnomah Group does not provide legal or tax advice. Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.

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