Searching for a provider to operate your 401(k) plan isn’t simple, and there’s a lot at stake. The vendor will have responsibility for your employees’ (and your own) retirement savings, and as a plan sponsor, you have specific fiduciary responsibilities under the Employee Retirement Income Security Act of 1974 (ERISA). The most significant is the “exclusive benefit rule,” which requires you to make sure the plan is operated solely in the interest of its participants and beneficiaries. Failing to live up to your legal responsibility could get you in trouble with government regulators and leave you vulnerable to workers’ lawsuits.
As the plan fiduciary, you must also perform your duties with a high standard of care, skill, prudence, and diligence, and that includes your role in hiring service providers and investment advisors. Also, ERISA requires diversification of plan investments to minimize the risk of large losses. You’ll need to keep in mind all of these rules and responsibilities as you search for a vendor to handle your plan. These 10 steps could help.
1. Assess your current plan. If you’re considering replacing the firm providing a current plan, you’ll want to make sure you get something better, and that starts with defining what your plan provides, including record keeping and compliance services, investment management, communication, and technology. And what’s the plan’s total cost for administrative, investment, and consulting services?
2. Decide who will choose your new vendor. If you are the sole owner of a small business, you will probably keep the decision in your own hands. But for larger companies or those with several owners, you may want to form a committee that could include trustees or employees.
3. Get help screening vendors. A broker or consultant could help you compile a list of potential vendors and work with you in weighing their qualifications. But you’ll first need to do your own due diligence to assess each consultant’s background. Consider how the consultant will be compensated—through fees, commissions, or a combination of the two.
4. Establish your new plan’s main objectives. In comparing possible vendors, it’s essential for you and your advisors to know exactly what you want from a vendor.
5. Select your markets. Start by determining which type of service provider you will use. You might choose to work with a bank, an insurance company, a financial brokerage firm, or a mutual fund company. Next, consider whether you’ll be contracting for “bundled” or “unbundled” services. Bundled providers deliver all of the essential components of a plan, whereas with an unbundled system, two or more organizations provide the services. Often, plan sponsors use a third-party administrator to handle compliance issues and record keeping.
6. Develop an investment policy statement (IPS). Often overlooked, this step can help you streamline your search and selection process. An IPS should spell out the plan’s objectives and detail when and how investment managers can be hired and fired.
7. Create a request for proposals (RFP). This is the nuts and bolts of the selection process and should describe all of the information you want potential vendors to provide. Typically, an RFP will ask about:
The goal of your RFP should be to find out, in as much detail as possible, whether a particular vendor matches up well with your organization.
8. Analyze vendor responses. Compare all of the proposals with each other and with your current plan, category by category.
9. Select and interview finalists. For your meeting with each finalist, create an agenda that details when you’ll meet, the names and titles of all attendees, a statement of your objectives, and an outline of issues to discuss. You may want to ask questions about record keeping, plan administration, investments, employee education, the process for converting from your current plan, and costs and fees.
10. Finalize the arrangement. At long last, you’re ready to choose a provider and negotiate the contract. There may be some give and take on certain fees, so be sure to ask. Here, and during this entire process, we can work with you to make sure you choose a vendor that will serve your employees well and help you meet your fiduciary responsibilities.
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