Plan Sponsor Due Diligence During Recordkeeper Acquisition

Whether or not it’s by issuing an RFP, sources agree that plan sponsors whose recordkeeper is being acquired or merged with another should do some investigating into the changes that may occur.

The trend of recordkeeper consolidation has affected many retirement plan sponsors. And, while it has decreased the pool of eligible choices, plan sponsors still need to prudently select the right recordkeeper for their plan and participants.

What if a plan sponsor knows nothing about the recordkeeper that will handle its retirement plan going forward? What if the acquiring recordkeeper is one that was not selected during a previous request for proposals (RFP) process by the plan sponsor? Would it be considered a best practice to issue an RFP/RFI at this time or wait to see how the conversion plays out?

Vince Morris, president of Resources Investment Advisors, a registered investment adviser (RIA) that supports about 28 brands, and president of Bukaty Company Financial Services in Kansas City, Kansas, says it’s not a must nor a regulatory requirement to issue an RFP. “If we have vetted the recordkeeper that is doing the acquisition, we can advise the client about whether the fee/cost structure is changing and whether the plan funds are changing,” he says.

But, Morris says, if there’s a huge amount of structural change to costs or investment lineups impacting his clients, it would trigger a fiduciary requirement to examine the reasonableness of fees as well as the suitability of the investments.

According to Gregory Metzger, senior consultant at North Pier Search Consulting in Marina Del Ray, California, all conversions cause significant disruption for plan sponsors and participants. “There should definitely be some research into the organization that will be administering your employees’ retirement plans. RFPs are an excellent tool for this task,” he says.

“Doing nothing is a decision!” Metzger adds. “Accepting a conversion without evaluation is not prudent.” He says it is in the best interest of the participants to evaluate service. Change may not be necessary, but a well-informed decision is required.

While he believes an RFP is not a necessity, Morris says that if a plan sponsor is not working with an adviser, it has to do some sort of due diligence on its own. In addition to the cost of investments, it should also look at cybersecurity practices and the handling of administrative errors.  Plan sponsors should find out whether there will be an assignment of a service agreement or a new agreement. “If the plan sponsor is entering into a new agreement, it will have to do due diligence,” he says.

According to Morris, an adviser brings to the table a conversation around the timeline for the conversion. Changes won’t happen right away, they will take time. He notes that many times the new recordkeeper will keep the acquired company’s platform, but plan sponsors should know whether the conversion will be to a new platform and whether it will trigger a custodian change.

“Plan sponsors should have patience and see what the deal is like and the consequences,” Morris says. He adds there will be people communicating from the new recordkeeper because it wants to retain business. The acquired recordkeeper should also be communicating about changes, and advisers should be communicating with clients. Plan sponsors will have plenty of expertise.  According to Morris, if the recordkeepers involved in the deal are not communicating, plan sponsors will need to look into the marketplace to see if another plan sponsor has experience with those recordkeepers or if a different recordkeeper will do a better job.

He says plan sponsors can ask to speak to a current client of the acquiring recordkeeper. For example, if it is announced that Wells Fargo clients will be moving to Principal’s recordkeeping platform, then Wells clients may want to ask for referrals of current Principal clients to talk about their experience.

From an adviser perspective, Morris says, “If we have 10 Wells clients being acquired by Principal or Aspire clients being acquired by PCS, we wouldn’t just automatically issue an RFP. We would just try to get an understanding of the consequences and analyze the situation on behalf of the clients then talk to each one about the changes, timeline and what the due diligence process should be.”

When a recordkeeper acquisition or merger is announced, other providers may reach out to plan sponsors with the message, “You might as well put your plan out to bid now because you will be going through a conversion anyway and will want to do that for fiduciary reasons.” Morris says plan sponsors could ignore such sales tactics.

However, Metzger says, “A good idea is a good idea. Plan sponsors should respond to the message if not the messenger. Specialized search consultants with deep industry experience can guide plan sponsors, streamline the process and serve as an advocate for the plan ensuring that proper procedure is followed and documented.”