There seems to be a lot of talk in the industry about benchmarking retirement plans. This may be attributable to the new disclosure requirements under 408(b)(2), or the recent wave of retirement plan litigation related to fees. Whatever the reason, retirement plan vendor* benchmarking is all the buzz.
Furnishing goods or services between a party in interest and a retirement plan is usually a prohibited transaction under section 406(a)(1)(C) of ERISA. However, 408(b)(2) provides for a prohibited transaction exemption so long as the goods and services are necessary for the operation of the plan and no more than reasonable compensation is paid.
How will a fiduciary determine if a vendor arrangement is reasonable unless the vendor is compared to other vendors? The obvious need is a benchmark.
Before jumping into a vendor benchmark project, a plan fiduciary will want to evaluate four main considerations to ensure general fiduciary duties are being met:
• What is the purpose of the vendor benchmark?
• What should be done with the benchmark information?
• What is the source of the information contained in the vendor benchmark?
• Is the benchmark information meaningful?
Let’s take a closer look at each of those four considerations.
1. What is the purpose of a vendor benchmark?
The purpose of a vendor benchmark is to determine whether the retirement plan vendor’s arrangement is reasonable. As a result, the vendor evaluation is separated from the plan’s investments. (Click here
more narrative to differentiate the vendor and its product from plan investments.). If investment expenses are comingled with vendor expenses, then the investment expenses could unduly influence whether the vendor’s fees are reasonable.
2. What should be done with the vendor benchmark information?
The primary objective of the vendor benchmark should be to determine whether the vendor is providing a reasonable arrangement, or if a search to consider a replacement is necessary. Secondary objectives of the vendor benchmark should focus on improvements that can be made with the existing vendor.
3. What is the source of the information contained in the vendor benchmark?
There are really only two sources of information that can be provided for a vendor benchmark. The first being specific information collected directly from other vendors for the plan conducting the benchmark (the responses provided by each vendor would be a custom response for the plan to be used in the benchmark). The second being general data collected from industry sources. A common example of an industry source would be data obtained from Form 5500 filings. The general data is then related to a set of assumptions for purposes of benchmarking.
4. Is the benchmark information meaningful?
The answer to this question is more subjective in nature. However, as a matter of professional opinion, the specific information benchmark will be more meaningful because the benchmark information collected is specifically for the plan based upon the specific information of the plan. This is especially true when compared to the general data benchmark that references a repository of information. When determining if the general information is meaningful ask yourself whether or not the assumptions of the general data are accurate enough to be truly representative of the plan being benchmarked? Can the general data be used in negotiating with the existing vendor? If the primary objective of the vendor benchmark is to determine whether the vendor is providing a reasonable arrangement or if a search to consider a replacement needed, then the specific information benchmark would provide greater significance.
We did this for what reason?
Although there are many reasons fiduciaries should be benchmarking retirement plan vendors, the prohibited transaction exemption along with general fiduciary rules and responsibilities top the list. The Department of Labor’s Meeting Your Fiduciary Responsibilities publication states, “An employer should establish and follow a formal review process at reasonable intervals to decide if it wants to continue using the current service providers or look for replacements.”1
Some general fiduciary duties include:
• Acting solely in the interest of plan participants and their beneficiaries and with the exclusive purpose of providing benefits to them;
• Carrying out their duties prudently;
• Paying only reasonable plan expenses
Benchmarking a vendor should be more than a “check-it-off-the-list” exercise. There are fiduciary duties that need to be sufficed, but there are also plenty of potential opportunities to consider. You, as a plan fiduciary, should understand what you are committing to, how you will evaluate results, and how vendor benchmarking relates to your fiduciary duties before embarking on vendor benchmarking in order to get the most out of the project.
*Note: For purposes of this article, vendor refers to the retirement plan product (including recordkeeping, testing, reporting, custody and trustee).
Meeting Your Fiduciary Responsibilities, May 2004 U.S. Department of Labor Employee Benefits Security Administration
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