The scenario is familiar to many 401(k) plan sponsors. The plan’s third-party administrator has not been performing up to expectations—perhaps dropping the ball on timely reporting, or not providing adequate employee education, or not managing compliance issues. As a result, company leaders have decided to look for a new provider.
That decision is just the beginning of a time- and labor-intensive process that requires close management and monitoring. Because the employer’s HR professionals are likely to play a central role in the choice of a retirement plan provider, they need to make sure the company moves forward carefully.
“This is not something to take on spontaneously,” says Mike Murphy, SPHR, CCP, CEBS, director of compensation and benefits for Shoe Carnival Inc., a multistate footwear retailer based in Evansville, Ind. “It requires strong project plans.”
Indeed, HR professionals who have been involved in selecting a service provider have found it to be a complex undertaking that requires a positive outcome. After all, the choice of a plan administrator falls squarely within a plan sponsor’s fiduciary responsibility to participants, particularly in light of the increased scrutiny—on several fronts—of the fees that plan participants and plan sponsors pay to vendors.
Moreover, this process is likely to garner more than its share of attention, both among company executives before the process begins and among employees once the provider is in place. “Make sure you get people on board, including senior management,” says Alan Vorchheimer, a principal with Buck Consultants in New York City. “Changes to a 401(k) plan affect everyone, and people will have opinions about how the process should be managed” and what criteria the employer should use when choosing a provider.
The First Two Steps
Before an organization even begins the search for a new plan administrator, first, the HR professionals leading this process need to gauge what is happening in the marketplace. And second, executives and employees—the organization as a whole—need to determine what they want, need and expect from a provider.
The 401(k) plan administration market is a mature one with well-established providers and relatively few entrants. In general, it’s a market divided by plan size. Small plans have up to 100 participants, medium-sized plans have 100 to 1,000 participants, large plans have 1,000 to 10,000 participants, and jumbo plans are those with more than 10,000 participants. “These four groups represent different segments with different providers,” Vorchheimer says.
From the plan sponsor’s perspective, consolidation represents the most important market trend. When a 401(k) plan administrator is acquired by another player, that transaction and its aftermath can have significant impact on the plans these players serve. When a provider is acquired, the newly combined entity could make changes to services, and there can be some bumps during the transition as the two organizations combine. “If there is any indication of [a] provider being involved in a potential merger or acquisition, you might consider avoiding that provider,” advises Lisa Arko, a consultant with Watson Wyatt Worldwide in Philadelphia. “There can be lingering integration issues for years after a merger or acquisition.”
Once a plan sponsor has developed a sense of the marketplace, the organization’s leaders must spell out what the company administering the 401(k) plan must provide. For example, if employees are having difficulty making investment decisions or if participation is low, educational tools and participant communication could become extremely important in choosing a plan service provider.
Or, the plan sponsor may be looking for other capabilities—perhaps clear and thorough reporting for HR or the executive team on plan participation and average deferrals, or turnkey service in supplying information and supporting data for the plan’s annual audit. If regulatory compliance is a key issue for a plan sponsor, focusing on providers with a longstanding presence in the 401(k) administration business can help ensure that the provider ultimately selected will be experienced in dealing with changing regulatory issues and that the employer’s plan will remain in compliance.
If the current administrator is being replaced, HR professionals should articulate to themselves the reasons for the change and the attributes or services that the new provider should offer to be a better choice. At the same time, however, when selecting a provider, HR professionals need to guard against overemphasizing capabilities where the current provider has fallen short but that are only moderately important.
Because it is unlikely that any one provider will be strong in every area that the company needs, set priorities about the most important attributes. This allows the plan sponsor to evaluate providers based on clear and objective criteria established before the beginning of the process.
While a plan sponsor can critique a vendor’s performance at any time, a contract with a vendor can include scheduled evaluation points, such as annually or quarterly.
Consider factors about a new provider that would resonate with employees. “In some cases, employees respond to a provider’s name recognition because it provides them with a level of comfort,” says Lane Transou, manager of compensation and benefits for Global Industries in Houston. This is especially true when volatility in financial markets is making plan participants nervous about their retirement savings.
The Proposal Phase
Once executives have determined what they want from their retirement plan vendor, HR professionals need to develop a comprehensive request for proposals (RFP), defining exactly what the company needs, and present that information as clearly as possible. The employer should send RFPs to six to eight vendors, most likely yielding responses from at least five—a group large enough to allow for adequate comparisons.
Send requests for proposals to six to eight vendors, most likely yielding responses from at least five—a group large enough to allow for adequate comparisons.
“RFPs should include 50 to 75 questions,” says Larry Heller, director of employee benefits services at Becher, Della Torre, Gitto & Co., an accounting firm in Ridgewood, N.J. “There are dozens of categories of information you include in an RFP.”
To keep them focused, Heller suggests, organize questions and content on the basis of the plan sponsor’s identified priorities so that responding vendors can frame their proposals and presentations accordingly. “Be clear about what you are looking for,” he says. “Generic questions will generate generic answers, but pointed questions will generate more information.”
In general, the RFP should include questions about the vendor’s organization and management, the implementation and conversion process and services, plan administration capabilities, participant services, plan sponsor services, investment management capabilities and guidelines regarding types of investment funds, and fees.
“Every provider is different, so it can be difficult to make apples-to-apples comparisons,” says Raylana Anderson, SPHR, CEBS, director of HR at engineering firm STS in Bloomington, Ill. “You can help minimize the differences by emphasizing in the RFP that proposals that don’t match your requirements won’t be considered.”
Heller suggests that plan sponsors develop a grid for plotting quantitative information gathered from each vendor. When it comes to qualitative information, he recommends that plan sponsors identify significant differences among the candidates. Distinguish between marketing propaganda and real information, he says.
Even when a plan sponsor takes the time to develop a comprehensive and clear RFP, vendors will still break out and present information in different ways. “Vendors offer what they want you to know, so do your homework and ask questions,” Murphy says.
For example, if a provider describes its customer service as leading-edge, dig deeper to determine what the claim really means. During what hours can participants call customer service? Will they be able to reach a person? Or will they have to use an interactive voice-response system? Is the vendor pushing more users to go online for customer service needs? And if so, what will this mean for telephone-based customer service in the future?
If a company’s selection of a retirement plan administrator is “based solely on what the vendors send in response to the RFP with no follow-ups, you are not doing yourself any favors,” Transou says. “In many ways, this process is like hiring new employees, and you have to conduct due diligence.”
Retirement plan fees, until recently carefully hidden, make up perhaps the most sensitive aspect to consider when choosing a vendor. Given the growing scrutiny from many sides on fees, plan sponsors need to show that they have a clear understanding of what fees are being paid to whom and by whom.
Obtaining a clear picture of fees is not always easy, however. “While administrative fees tend to be more transparent, investment fees are not, and you have to dig them out,” Vorchheimer says. “Providers all price differently, so you have to ask questions about whether administrative costs are being covered by investment fees. If the plan pays 100 basis points [there are 100 basis points in 1 percentage point] in investment fees, how much of that is being used to subsidize administration? Be dogged about getting this information.”
To get comparable information from prospective administrators, ask the same questions of all vendors. See the online version of this article at www.shrm.org/hrmagazine for a link to a U.S. Department of Labor worksheet designed to help plan sponsors gather information about fees.
Once the RFP process is complete, invite two or three finalists for individual meetings on-site and set up any due diligence events, such as on-site visits to the vendors. These finalist meetings should focus on how the vendors would handle the transition from the current provider, including managing outstanding loans and shutting one provider and going live with the new provider.
These meetings should include representatives from the plan sponsor, including one of the plan’s fiduciaries and the person—such as an HR professional—who administers the plan day-to-day, plus representatives from the potential new vendor, including an account manager, a transition specialist and a systems expert. (No representative of the vendor being replaced would be at meetings in advance of selecting a new vendor, but after a selection has been made, the outgoing vendor, if willing, would be included in transition meetings.)
The final element in choosing a vendor is also the most intangible—how well the plan sponsor and the vendor are likely to work together. “Remember that the chosen vendor will be a partner with the company,” Transou says, “so it is important that you feel comfortable asking questions and that the vendor be willing to answer those questions and collaborate with you.”
The author is a New Jersey-based business and financial writer whose work appears in Business Finance, Consulting, Compliance Week and Treasury & Risk Management.