The selection process a plan sponsor uses to hire a 401(k) recordkeeper can dramatically affect the long-term success of the plan and, in some cases, can mean the difference between compliance and noncompliance. Unfortunately, we often see well-intentioned sponsors make common mistakes during the process.
We recognize that it isn’t easy to navigate this competitive marketplace. There are a wide variety of providers offering an array of services that may or may not all be relevant to every organization. This is typically where an adviser or other financial intermediary comes in.
The single largest mistake we see sponsors make, however, is the selection of an adviser and a recordkeeper at the same time. The scenario happens frequently: The sponsor calls in two or three advisers, each one picks a recordkeeper he or she feels will be best and does a presentation for both the adviser’s services and the recordkeeper’s services, and one “team” wins. As we will discuss below, this is a flawed approach.
No two plans are the same
Let’s start with the premise that no two organizations are the same and no two plans are the same. Even if the assets and employee count are similar, the unique needs of each organization can be very different. A plan for a manufacturing company will have very different needs than that of a plan for a law firm.
On the provider side, it is also important to recognize that each 401(k) provider has its own strengths and weaknesses. Not all providers service all plan sizes. They may say they do, but they don’t—at least not well. Some providers are set up internally to handle thousands of employees by way of automation and strong online features. Others are geared for more hands-on consulting but don’t offer automatic distribution of notices, for example. The goal of the request for proposals (RFP) process is to find the provider whose strengths best line up with the plan’s needs.
When you keep that in mind, it becomes clear why, when both adviser and recordkeeper are being evaluated in an RFP, the decision making process is automatically complicated. What if, for example, the recordkeeper that Adviser A brought in is the best fit, but Adviser B seems like the best fit on the adviser side? Does the committee select from two different teams?
Additionally, understanding the unique needs of an organization and its plan takes time. I always tell sponsors to be leery of any adviser who brings in a provider without spending considerable time understanding their organization and workforce. There is simply no way an adviser can blindly pick the right recordkeeper for a plan without knowing more about the organization.
The best practice is to pick your adviser first and then let the adviser help you select a recordkeeper. When selecting an adviser, among other things, it is important to select one who is completely independent of any specific providers. This means that the recordkeeper and the adviser do not have any financial conflicts – i.e., the recordkeeper does not pay any special referral compensation, marketing costs, etc. Partnering with an adviser who works with all of the major recordkeepers is helpful, as it increases the adviser’s visibility into the entire provider landscape. The list of options can quickly be trimmed down to those few that most likely fit your plan’s needs. An experienced adviser can also highlight the unique nuances, strengths and weaknesses of each provider candidate. These are benefits you simply will not get if you are in a situation where each adviser has to select one recordkeeper.
What if you already have an adviser?
If you already have an adviser and you are comfortable with his (or her) ability to guide you through this process, then you are ahead of the game. Let your adviser manage the RFP for you.
If you are unsure of your adviser’s independence or understanding of the market, then it may be time to look for a new adviser as well. Again, select your new adviser first. It may seem like an extra step, but, in the end, it will lead to a significantly better outcome.
Other tips for running the perfect RFP
- Select the right decisionmakers. A recordkeeper selection should not be made in a vacuum. It’s important to ensure that both the financial and human resources (HR) decisionmakers are part of the process, as this will help ensure their interests are represented when evaluating candidates.
- Make a list of criteria. The committee should agree on a set of written goals that the organization expects the provider to able to facilitate. For example, is the sponsor seeking a provider that will satisfy regulatory obligations and generally limit overall plan expenses, or does it intend to use the plan as an employee-recruitment tool with high-touch features for participants?
- Limit your candidates. Consider a limited approach to RFP issuance. Either you or your qualified adviser should expend the effort upfront to shorten the list to five pre-qualified providers; this will result in a higher-quality pool of candidates and limit the amount of RFP scoring required by the committee.
- Interviews are important. The ideal short list should contain two candidates, or three if they’ve scored closely. These recordkeepers need to be invited to give a finalist presentation to the committee. They have already been deemed qualified, and now is when the plan sponsor needs to be convinced of which finalist is the right fit for the organization. Sponsors should insist that the presentation team include someone who will be involved at a high level in the ongoing work for the plan, not a business development person.
- Don’t get distracted by “sliders.” As a professional plan adviser, I’ve sat in hundreds of finalist presentations. I’ve listened to scores of providers go on and on about how their website has a “slider” that allows a participant to see what a gradual increase in his deferral rate will look like. Is this important? One hundred percent. Is it what we should focus on in a finalist presentation? No. This time should be used to focus on how the provider will solve the specific challenges faced by your plan. The bells and whistles should be demonstrated in a separate website presentation.
- Don’t forget conversion. How does the process of converting your plan to the new recordkeeping platform happen? Who is in charge of overseeing that process? (Hint: Your plan adviser should be heavily involved).
A typical RFP process should take between one and three months, depending on the availability of the committee and the depth of the RFP itself. We have found that RFPs that go longer than this tend to result in the company deciding to retain the status quo.
There is little question that the RFP/provider selection process can be time-consuming. It is, however, an important and necessary part of fulfilling your fiduciary responsibility.
Andrew Zito, AIF, is executive vice president, retirement plan services, at LAMCO Advisory Services, an independent retirement plan consulting and advisory firm.
This feature is to provide general information only, does not constitute legal or tax advice, and cannot be used or substituted for legal or tax advice. Any opinions of the author do not necessarily reflect the stance of Strategic Insight or its affiliates.
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