As an employer sponsoring a retirement plan, you have quite a few responsibilities on your plate. When it comes to choosing the right vendor for your company benefits plan, people are watching – your employees, other businesses and the dreaded compliance department.
Avoid these common mistakes to minimize unnecessary compliance headaches:
1. Picking a vendor because of a prior relationship or potential discount
As a fiduciary, you have an obligation to act in the best interests of your employees. This includes selecting the vendors that serve your retirement plan. If you choose an entity you already do business with (e.g. your bank or health benefits broker), you still need to perform proper due diligence (and keep the related documentation) to prove they will be a good fit for your company’s retirement plan. Simply choosing a provider because of a past or current relationship isn’t enough.
Even worse, selecting a provider in order to obtain a discount on services or other personal benefits – such as using your bank for 401k services to get a better loan rate for the company – is aprohibited transaction called self-dealing. This can result in personal and professional liability for those involved. This is still considered a violation of fiduciary responsibility even if the retirement plan fees are reasonable and the selection of the vendor did not harm the plan participants in any way.
Key takeaway: Use a well-documented process to select vendors that best meet the needs of the plan. The documentation is necessary to protect your liability and support your final decision in which providers you hire.
2. Picking the lowest cost vendors possible. Cheaper isn’t always better.
The Department of Labor passed fee disclosure regulations in 2012 to help companies understand plan costs. The goal was to help employers determine how reasonable the fees are for the services performed. There was no mention of them needing to be the cheapest. By focusing solely on price, employers will get what they pay for. Employers should evaluate the plan fees and services to ensure they are reasonable. Paying for expensive services you won’t use is unwise, but excluding useful services just to cut costs may get you in trouble with compliance down the road. To determine if your plan’s fees are reasonable, compare them to a few other vendors in the marketplace. Evaluate the services provided by others and see if you’re paying for bells and whistles your plan doesn’t need.
Key Takeaway: Find a provider that charges reasonable fees for the services provided, even if they aren’t the cheapest available.
3. Not reviewing your plan every few years.
The retirement plan marketplace is constantly evolving and your plan’s services and pricing can become stale after a few years. An employer can keep their fees current by asking for updated proposals and pricing from existing and new service providers every three to five years. Instead of relying on benchmarking services, the best way to benchmark your plan is by obtaining vendor proposals specific to your plan’s demographics and size. By going directly to vendors instead of using a benchmarking service, you will receive an apples-to-apples comparison of your current pricing vs. what is available in the marketplace. Documenting this ongoing monitoring process will serve to protect plan fiduciaries while ensuring plan fees are reasonable.
It is essential that you review your current plan every few years to make sure it’s competitive and be sure to document the process. For more information on the importance of a retirement service provider, download our ebook, “The Value of a Retirement Plan Advisor.”
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