Business owners are generally responsible for ensuring their 401(k) plans and other types of retirement plans comply with federal law. That includes the Employee Retirement Income Security Act (ERISA).
To help carry out such responsibilities, owners often rely heavily on service providers to assist in controlling, managing, and overseeing plans and their investments.
Under ERISA, a fiduciary is any person or entity exercising any authority or control over the plan’s assets. They may provide investment advice for compensation or be an entity that exercises discretionary authority or control over the plan’s management. They may have discretionary authority or responsibility over plan administration.
A plan must have at least one fiduciary (person or entity) named in the written plan. The fiduciary could also be a committee or the board of directors.
Because of the importance of their responsibilities, fiduciaries are subject to certain standards of conduct. They must act solely in the interest of plan participants and beneficiaries, with the exclusive purpose of providing benefits while paying reasonable expenses to administer the plan.
The law also describes the need to act with the care, skill, prudence, and diligence under circumstances that a prudent person acting in a like capacity and familiar with such matters would use.
Thus, prudence is the focus of the process of making fiduciary decisions. Given this definition, it is wise to document all plan decisions and the basis for those decisions. That includes hiring any plan service provider. A fiduciary may want to survey a number of potential providers, ask for the same information, and provide the same requirements. This would reflect prudence, allowing the fiduciary to document the process and make a meaningful comparison and selection.
Choosing With Care
When selecting service providers, Wipfli and the Employee Benefits Security Administration offer these helpful tips:
- Consider what services you need for your plan:legal, accounting, trustee/custodial, recordkeeping, investment management, investment education, or advice.
- Ask service providers about their services, experience with employee benefit plans, fees and expenses, customer references, or other information relating to the quality of their services and customer satisfaction with such services. Be sure you know who you will be working with.
- Present each prospective service provider with identical and complete information regarding the needs of your plan. You may want to get formal bids from those providers that seem best suited to your needs.
- Ask each prospective provider to be specific about which services are covered for the estimated fees and which are not. Compare the information you receive, including fees and expenses to be charged by the various providers for similar services. Plan fiduciaries are not required to pick the least costly provider. Cost is only one factor to be considered in selecting a service provider.
- When comparing estimates from prospective service providers, ask which services are covered for the estimated fees and which are not. Some providers offer a number of services for one fee, sometimes referred to as a “bundled” services arrangement. Others charge separately for individual services. Compare all services to be provided with the total cost for each provider. Consider whether the estimate includes services you did not specify or want. Remember, all services have costs.
- Estimates should include a description of all compensation related to the services to be provided that the service providers expect to receive directly from the plan, as well as the compensation they expect to receive from other sources.
- If the service provider will handle plan assets, make sure the provider has a fidelity bond (a type of insurance that protects the plan against loss resulting from fraudulent or dishonest acts).
- If a service provider must be licensed (attorneys, accountants, investment managers or advisors), check with state or federal licensing authorities to confirm the provider has an up-to-date license and whether there are any complaints pending against the provider.
- Understand what obligations both you and the service provider have under the agreement and whether the fees and expenses to be charged to you and plan participants are reasonable in light of the services to be provided.
- Prepare a written record of the process you followed in reviewing potential service providers and the reasons for your selection of a particular provider. This record may be helpful in answering any future questions that may arise concerning your selection.
- Obtain a commitment from your service provider to regularly provide you with information regarding the services it provides.
- Periodically review the performance of your service providers to ensure they are providing the services in a manner and at a cost consistent with the agreements.
- Review plan participant comments or any complaints about the services and periodically ask whether there have been any changes in the information you received from the service provider prior to hiring.
Choosing a service provider is one of the most important fiduciary responsibilities business owners can make. By using the guidelines above, you can establish a strong foundation for a successful relationship.