Selecting Retirement and Fringe Benefit Plan Providers

This year the United States Department of Labor finally articulated a principal that the benefit community had implicitly understood since the passage of ERISA in 1974. The selection of service providers for retirement or fringe benefit plans by a plan sponsor or administrator is an exercise of authority or control over plan assets and is, therefore, an exercise of fiduciary responsibility under governing federal law.

Fiduciary responsibility is the greatest degree of liability that can be created by law. ERISA requires that these responsibilities be exercised only in the interests of plan participants and beneficiaries and with the care, skill, prudence and diligence of an expert in these matters. If a fiduciary fails to exercise these responsibilities properly, it can be liable for civil penalties of up to 20% of the amounts involved; damages (including not only actual losses but also gains that would have accrued); and, in cases of prohibited transactions or self-dealing, an excise tax that can easily reach 90% of the amounts involved.

This responsibility should not be taken lightly. Fortunately, the Department of Labor has provided a road map to properly discharging the fiduciary responsibilities involved in selecting service providers. The Department suggests that a fiduciary:

• Utilize an objective process to evaluate service providers,
• Assess the providers qualifications,
• Evaluate the quality of services offered by the provider, and
• Determine the reasonableness of the fees charged.

Fulfillment of these requirements no longer allows employers to listen to one or two sales presentations with a cursory review of the slick marketing brochures that accompany the presentations. An objective process requires a detailed request for proposal which sets forth the employer.s objectives, the current and desired plan design and then through a series of questions elicits the providers. (and specific personnel) qualifications, experience and expertise; the detailed list of services to be provided; the time frames for provision of services; penalties for failure to comply with stated deadlines; specimen documents and service agreements; if investments are involved the selection and performance; positive and negative (in the form of names of terminated clients) references; fees to be charged; outside compensation or commissions to be received; restrictions on termination, withdrawal, or change of providers; and proposals for adequate communication to participants.

Responses to the proposals should be in writing and evaluated by a group which includes competent, objective employee benefits counsel. Generally, following this review, a group of finalists is selected for personal interviews with the selection committee. Following the interviews, a provider is selected contingent upon completion of all legal documents and establishment of a satisfactory implementation timetable.

On the heels of the fiduciary reminder, the United States Department of Labor published two reports - a consumers. guide to 401(k) fees and a specific study of the range of fees experienced in 401(k) plans. The fee study dramatically illustrated the need for (and the pitfalls of not engaging in) a process to review provider fees. The study reviewed the fees charged by 17 major service providers for 401(k) plans with 100 participants and $2 million in assets. The report found that potential fees were:



Although the report did not assess the quality of services provided, it is a safe bet that the fiduciaries who selected providers at the high end of the range would be subject to special scrutiny of their actions. The key to compliance with ERISA responsibilities continues to be initial and annual procedures that diligently assess all benefit service providers.