Three terms most commonly used when judging vendors are the
RFP, request for information (RFI) and benchmarking studies, said Michael Kozemchak,
managing director at Institutional Investment Consulting.
“Benchmarking studies compare your plan to 10 to 40 similar plans via a scattergram,” Kozemchak said. Most are based on data that is three or more years old, and do not provide a true picture, added Robert Massa, chief investment officer at Ascende Inc.
Kozemchak dismissed RFIs as “garbage in, garbage out” and a
“fruitless” exercise that some plan sponsors have turned to as a result of the
408(b)(2) requirement that that they ensure the reasonableness of fees paid to
the vendors and providers in their plan.
The most robust way for a plan sponsor to review their vendors is through a rigorous RFP process, Kozemchak said. “RFPs are periodically necessary because of litigation,” said Vincent Morris, president of Bukaty Companies.
Inevitably, Kozemchak said, the RFP “will yield surprises, such as what you are actually paying, or that your plan documents are misaligned with how the plan is actually being run.”
Massa added that RFPs can reduce fees. “There was a time
when it was a fiduciary policy to benchmark your fees,” he said. “With 408(b)(2),
we went a step further; it is now a regulatory requirement.” Otherwise, plan
sponsors risk litigation, and many of these cases are settling in the $10
million range, Massa said.
“The next wave will be how fees are being allocated among participants,” Massa said. Cases will begin looking at “investment management fees, revenue sharing and recordkeeping fees—and how you are allocating these fees among your participants. Is it level and equitable? Are fees reasonable?”
Sponsors can avoid these lawsuits by issuing RFPs, speakers said. “If you haven’t gone to market in the past five years, you have to be prepared,” Kozemchak said. “There has been considerable fee compression,” so sponsors might be successful in lowering fees. However, also include your current incumbent, Morris said, because “it gives you leverage on fees and/or services.”
Sponsors should also issue RFPs to improve the quality of vendor services, Morris said. “Why search for a new recordkeeper? Is there a pain point? Is it because you need to do due diligence? Are you unhappy with your vendor’s services?” Before even starting the RFP process, he said, put your goals in writing and try to resolve problems before going through the process.
Many off-the-shelf RFP templates are available, such as those from The SPARK Institute, Morris said, but “you need to customize your RFP” by including the specific challenges your retirement plan is facing and the objectives you would like to meet.
Remember that before issuing an RFP to replace a vendor, there is always a tradeoff, Massa said. “Figure out what you want to get out of your vendor and what you like from them,” he said.
It is also a good idea to enlist the help of a third-party advisory firm or an
attorney to draft the RFP, because if you do it yourself, you must meet the
prudent expert standard,” Morris said.
Consider including your other employee benefit offerings, such as stock administration and a legacy defined benefit plan, Kozemchak said. “You may be able to use fewer vendors and create a better participant outcome,” he said.
After issuing an RFP, Morris recommends permitting vendors to come back with questions and then sending the answers to all the candidates to “level the playing field.” Then, when the RFP documents come in, parse through the information, use quantitative tools and resources such as the PLANSPONSOR Recordkeeping survey, Kozemchak and Massa said. Next, do a side-by-side analysis, Morris said. “Does the vendor include a relationship manager and serve 100 clients, or does the vendor include a relationship manager but serve only 20 clients?” Morris said.
Determine whether they offer compliance work and retirement readiness data, he said. Consider whether they offer education at flexible price points, Massa added. “Is the recordkeeping data protected from identity theft through encryption during not just data transfers but through encryption where it is stored?” he asked. “What happens to participant data when they do compliance testing? Is it sent to third-party companies in countries such as Bangladesh that are not friendly with the U.S.?”
The final step is inviting the four or five panelists in for a presentation, but sponsors should not base their decision on just the sales pitch, Morris said. They should consider all of the criteria the panel has just spoken about, he said. And once you have the vendor on board, don’t forget to ensure that they are implementing everything they promised,” Kozemchak said.