One of the most important responsibilities of plan fiduciaries is hiring the right service providers. These providers must do competent-hopefully, superior- work for a fee that is reasonable in relation to the services provided. The best way to fulfill this responsibility is by doing an RFP (Request for Proposals). Engaging in RFPs can help fiduciaries demonstrate that they haven’t hired inappropriate or overly expensive plan providers if their choices are challenged.
In contrast to considering friends or relatives, who often are not the best people for the job, an RFP allows fiduciaries to conduct an objective search for the best providers for their plan. Fiduciaries who are unsure how to go about an RFP can consult their ERISA counsel or other advisers, and should be aware that they can hire specialists to quarterback the RFP for them if they are reluctant or too busy to take it on.
Here are the basic steps of an ERISA RFP:
1. Identify Good Candidates. Recommendations from peers at other plan sponsors who are happy with their service providers are a good place to start, and your ERISA attorney or CPA may also be able to identify candidates that they believe do a good job. A focused internet search will identify additional candidates. If a specialist has been hired to take the lead on the RFP, the specialist can identify candidates who would be a good fit for the size and type of plan. While there shouldn’t be so many candidates that the search is unwieldy, it is a good idea to expand the search beyond two or three candidates to get a good picture of the market.
2. Develop Your Proposal Request. The request needs to do more than identify the types of services your plan requires and the fees for those services. This is an opportunity to get much more information about the service providers than is available on their websites. ERISA has many special rules, so specific experience with ERISA accounts is a must. The request should ask for the number of ERISA clients the provider has, their average size, ERISA assets under management, and the rate of turnover of ERISA clients, as high turnover is often a sign of client dissatisfaction. Fiduciaries will also want to ask about extra services candidates can provide and staffing for the account. Request Form ADV if the search is for an adviser, and always ask about litigation and past disciplinary actions.
The request should ask whether the candidate receives compensation from plan investments and for specific information about the candidate’s cybersecurity protections.
It is advisable that the RFP request also require that the responses include a copy of the provider’s standard contract and ask about the extent to which those provisions are negotiable. The reason is that a one-sided contract with provisions that can’t be negotiated may disqualify the candidate from further consideration. It is helpful to know that as early as possible.
3. Set a Schedule. Without a firm response date and interim deadlines for steps, such as identifying finalists in the selection process, an RFP can get out of control and eat up more time than is necessary. Fiduciaries should also have in mind a date when they expect to be able to make their final selection. This is particularly important when replacing an existing provider, but RFPs should not be open-ended.
4. Review Responses. Select the most promising candidates for interviews. You can ask questions about their business and services prompted by the responses and try to negotiate for any special services or fee reductions. You will also get a feel for whether you are comfortable with the provider, and whether the provider is responsive and professional. You can’t tell these things from written responses.
Contrary to what some fiduciaries assume, ERISA does not require selecting the provider with the lowest fees. The quality and extent of the services provided are taken into account in determining whether the fees are reasonable. However, if you are looking for a new plan provider, reviewing the investment platform offered and the fees for available investments should be part of the selection process.
5. Make Your Choice. If you have a plan committee or a team assigned to run the RFP, as is typical, the members should discuss their reactions to the candidates and their choices. Ranking the choices is helpful. Finalists can be asked to allow you to speak with one or more of their current ERISA clients as well.
Document the reasons for the decision and notify the successful candidate, informing them that their selection is subject to negotiating a mutually acceptable service agreement. This is important because ERISA attorneys are sometimes contacted to review contracts after the selected candidate has started to work, and in that situation, there is little to no bargaining power to negotiate changes to provisions that may be one-sided or not market. (The successful candidate should also provide its ERISA Section 408b-2 fee disclosure prior entering into the arrangement.)
6. Coordinate with Other Providers. This is especially important if the provider is replacing another provider. Notify all affected parties of the change in identity of the person who can give instructions, and arrange for the transfer of or access to records. In many cases, a change in providers will also require sending participants a blackout notice in advance of the time they are unable to change investments or take loans or distributions from their accounts.
Make Periodic RFPs Part of Your Prudent Process.
Nothing in ERISA requires RFPs, but the Department of Labor recommends doing them on a regular basis, such as every 3-5 years. This is because the purpose of an RFP is not merely to replace an existing provider. RFPs are a good way to keep track of what’s happening in a rapidly changing market. If you are happy with your current provider, the RFP may still enable you to negotiate lower fees with that provider or for additional services that other candidates provide. A well-documented RFP is also good evidence for fiduciaries needing to demonstrate to an auditor or judge down the road that the plan is not overpaying for its services.