Recordkeeping Survey

Five hot-button issues plan sponsors need to cover in provider searches.

State of the Industry

State of the Industry

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Five hot-button issues plan sponsors need to cover in provider searches

While the Department of Labor (DOL) does not necessarily mandate plan sponsors to regularly run a request for proposals (RFP) to monitor their vendors, the regulatory agency does assume that “… plans normally conduct RFPs from service providers at least once every three to five years …” in anticipation of changes to provider fee structures and service disclosures.

Nearly two-thirds (63.8%) of plan sponsors responding to the 2018 PLANSPONSOR Defined Contribution (DC) Survey said they formally review their service providers annually; 55.8% have been with their providers for over seven years.

Although conducting a recordkeeper search can be arduous, the process is crucial, as selecting this business partner is an ongoing fiduciary duty, say Summer Conley and Michael Rosenbaum, partners with Drinker, Biddle and Reath, in Los Angeles and Chicago, respectively. Writing for PLANSPONSOR, they noted, “When selecting a recordkeeper, the committee must gather all the information regarding the recordkeeping arrangement, review that information and make an informed decision.”

Plan sponsors must follow a prudent process to both select and monitor any service providers engaged to support their plans. Therefore, requesting RPFs at regularly scheduled intervals can be part of an effective fiduciary liability reduction strategy and established plan governance program.

When a plan sponsor goes out to bid to hire a recordkeeper, its selection process can mean the difference between the plan succeeding or it failing to generate adequate savings, or even it putting participants’ personal identification information (PPI) at risk.

According to Tim Rouse, executive director at The SPARK Institute in Simsbury, Connecticut, there are many recordkeeper service attributes that most vendors offer today—including various qualified default investment alternatives (QDIAs), plan sponsor and participant websites, and the allowance for participant loans—but sponsors continue to cite these in their RFPs, anyway. However, some other considerations are becoming differentiators and may be key in a provider search as employer-sponsored retirement plans grow increasingly sophisticated and complex.

1. Privacy.

What immediately comes to mind for Marina Edwards, senior director, retirement, at Willis Towers Watson, in Chicago, is the recent settlement by Vanderbilt University in an Employee Retirement Income Security Act (ERISA) lawsuit that demonstrates plaintiffs’ and litigators’ focus on retirement plan data. In short, the agreement stipulates that plan data will not be used by service providers such as recordkeepers or asset managers for the purpose of cross-selling wealth management services and products to plan participants.

Therefore, Edwards says, “plan data needs to have the same level of care as fiduciaries apply to plan assets. Plan sponsors need to be able to show due diligence that they have investigated those policies, provisions and operations of the different recordkeepers. Every recordkeeper has to indicate how it protects this PPI from not only hackers and cyber crime, but from internal partners cross-selling services.”

“Depending on the size of the plan sponsor, you might have real difficulty in negotiating terms this way and stipulating exactly what a provider can or cannot do with data,” said David Levine, a principal at Groom Law Group Chartered, in Washington, D.C., speaking to PLANSPONSOR after the settlement was announced. “And there is the core question of how to define what plan data is and what is the proper use of plan data. This all is still to be fleshed out.”

“One other important caveat here,” said Groom Law Group principal Kevin Walsh, “is to remember that, through this settlement requiring tough terms of providers’ use of data, this may make it harder for the plan sponsor to be tough on other elements of contract negotiations. Plan data is important, but if you focus myopically on data, it may limit your ability to negotiate on other critical terms.”

2. Cybersecurity.

Cybersecurity is connected to privacy concerns but slightly different. Privacy concerns relate to legitimately sharing data; cybersecurity is about protecting data from illegitimate uses. Rouse says the number of detailed questions sponsors ask recordkeepers on this topic has skyrocketed, and recordkeepers worry about sharing their security processes. “It has gotten to the point where the providers have to say, ‘I know you’re my client and that you need to know your plan data is protected. At the same time, I can’t share with you the ways I’m going to protect your plan data because that information can get out and eventually be used by the bad guys.’”

In order to reassure sponsors and consultants, through the work of its data security oversight board, SPARK has developed standards to help recordkeepers confirm to current and potential clients the full capabilities of their cybersecurity systems.

These standards are not intended to provide a recommended level of cyberprotection, or guarantee against a data breach or loss, Rouse says. Rather, the goal is “to establish a base of communication through the use of independent third-party audits of cybersecurity control objectives.” In this way, sponsors and vendors can validate the robust nature of their cybersecurity systems.

After this Industry Best Practice Data Security Reporting program was implemented, SPARK did a survey. Rouse says, “We didn’t get a response back from everyone, but 12 of the 14 respondents have already implemented these SPARK cybersecurity standards. Each recordkeeper will create a report that can be used to compare one vendor’s security efforts with another’s.”

3. Participant Wellness Metrics.

With what appears to be an industrywide interest in participant financial wellness, plan sponsors also increasingly see the value of measuring the usage and effectiveness of their wellness programs, Edwards says.

“Plan sponsors are asking in RFPs what kind of reporting can be done by the provider, for instance, on a monthly, weekly or daily basis, to let the sponsor know, of its 5,000 participants, for instance, how many used a particular wellness website tool, or listened to a particular webcast? What do the analytic dashboards look like, and will the provider run reports for the plan sponsor or is the reporting system set up in such a way that the sponsor has access to create the reports itself?”

4. Revenue Sharing.

The concept of fee levelization is garnering attention from defined contribution plan sponsors and advisers industrywide, due to the increased volume of litigation over plan costs, and the focus of the Department of Labor Employee Benefit Security Administration (EBSA) on fee disclosures.

According to Michael Volo, senior partner at Cammack Retirement in Sudbury, Massachusetts, “With fee levelization, the recordkeeper applies its recordkeeping fee as a percentage of assets to each individual investment option.” If revenue sharing in the option exceeds the recordkeeper’s required revenue, it credits each participant who has assets in the fund with a share of the excess, he explains. If the investment provides less than the required revenue amount, the recordkeeper divides an additional fee, in the amount of the shortfall, among the accounts of those using the investment. “A participant with several different investments might experience multiple credits and debits based on the revenue sharing in each investment, relative to the required revenue.”

Are recordkeepers able to adjust for revenue sharing? Rouse says, fee levelization can occur in many different forms. For example, how often is the rebalancing performed at the fee level? Is it done quarterly, monthly or weekly?

“There are complications if you don’t rebalance on a regular basis, and there are issues of participants moving in and out of funds,” Rouse says. “But it’s kind of a table stakes feature that recordkeepers are, by and large, able to offer.” Plan sponsors compiling an RFP might therefore want to ensure the recordkeeper can accommodate their frequency of levelization.

5. Loan Repayments.

Edwards says plan sponsors should check the vendor’s capability to provide loan repayments for terminated participants. Most loan repayments come through payroll deductions. The question is, she says, can a recordkeeper allow for a former employee to still make loan repayments by coupon or automated clearing house (ACH).

This can be a benefit for plan participants, and not all recordkeepers can do this, she notes. Normally when a participant leaves an employer, his loan becomes due and payable within 60 days. Enabling loan repayments after employee termination allows the participant to continue to repay the loan and not have to take a taxable distribution for that amount if he is unable to pay it back in full at one time.

“Many plan sponsors are looking at this and amending their plan. The industry is trying to have participants keep as many assets as possible in the plan. That’s the directive. It’s not a given that all recordkeepers will do that, but it’s something we advocate for,” Edwards says.

Judy Faust Hartnett


Other RFP Considerations

When contemplating changing providers or benchmarking your plan, there are a multitude of services, regulations and technologies to inquire about in preparing your request for proposals (RFP). Here are a few additional points about commonly discussed features that, sources say, can help plan sponsors go deeper with their questions:

Plan analytics. “In the old days, we measured plans by using plan participation, average deferral rates and average account balance stats,” says Marina Edwards of Willis Towers Watson. “But we can use data in a much deeper capacity today.” One way recordkeepers can help plan sponsors apply plan analytics is to determine differences in saving behaviors across genders, age brackets or site locations, among other criteria.

Once that analysis is complete, she notes, “if we’re finding pockets within our population that need special attention, we can create direct and constant communication programs.” Plan sponsors interested in this area can say as much in the RFP, asking how customizable is the vendor’s dashboard and how often can it push out reports, she says.

Readiness tools. Retirement readiness tools have become a given, sources agree. Vendors have developed retirement readiness scores or projections for future account balances that employees can view on their employer’s participant website and mobile apps. According to Edwards, “We’re beginning to dive into the details of the assumptions and the data that’s used to create these retirement readiness projections. The inputs from the data used for the assumptions are not all created equal. So, in an RFP, it can be very helpful to understand what assumptions and metrics are going into those projection tools.”

Lifetime income. As to lifetime income, “There’s a demand coming from plan participants that plan sponsors are sensitive to; at the same time, the sponsors are sensitive to their fiduciary responsibilities, and recordkeepers are just trying to meet the demand,” says Tim Rouse of The SPARK Institute. Sponsors have been discouraged from offering such products for fear of having fiduciary responsibilities for the product or its provider years down the road, he says.

This will become a critical area of RFP focus for plan sponsors if the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act) or the Senate’s similar Retirement Enhancement and Savings Act (RESA) passes both houses, as either act creates a safe haven for offering in-plan annuities. Both House and Senate are said to be eager to move forward.

The safe harbor would shift the onus from plan sponsors to insurers and rely on the assurances of state insurance regulators that a carrier is adequately capitalized. “In the end, Rouse says, “maybe, participants will have to engage in some form of a contractual way; therefore, the responsibility for the products will be clearly delineated.”