Why Vendor Monitoring of Retirement Plans is Always Essential

Last Updated: June 05, 2013

As a qualified retirement plan fiduciary, you are entrusted to oversee other peoples’ retirement assets. You make decisions on the services to be offered and the fees incurred. Today there are more media stories, lawsuits and plan audits related to retirement plans than ever before. The big reason? Plan fiduciaries make decisions on how to spend participants’ money. In their publication, Meeting Your Fiduciary Responsibilities, the Department of Labor 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.” Can you imagine retirement plan fiduciaries not monitoring the plan’s investments? In the same vein, fiduciaries should monitor their
vendors such as the record keeper of participant accounts or the custodian who is actually holding the assets on behalf of participants. It is also important to note that vendor monitoring is different from a periodic benchmark or vendor search in that once the custom evaluation criteria are established, the vendor’s practices can be continually assessed. Determining Reasonableness ERISA §404(a)(1)(A)(ii) states that plan fiduciaries must defray reasonable expenses for a retirement plan while 408(b)(2) provides regulatory guidance for maintaining a reasonable arrangement with vendors.   Fiduciaries must be aware that to obtain relief from ERISA’s prohibited transaction rules, goods and services provided to a plan should be necessary for the establishment or operation of the plan as long as reasonable compensation – and not more – is paid.  There is no requirement to buy the least expensive service.  In fact, if the service is necessary for the operation of the plan, a plan fiduciary should spend the money.  But, as a reasonable consumer, if you wouldn’t pay for services you don’t need or use, you shouldn’t expect the plan to either. Vendor Monitoring Objective #1: The first objective in vendor monitoring is for fiduciaries to evaluate the services and fees being provided in order to make an affirmative determination whether or not the arrangement is reasonable. Evaluating and Monitoring the Plan ERISA §404(a)(1) states that a basic fiduciary duty is to act in the best interest of participants. Fees Once the test for reasonableness has been satisfied, fiduciaries need to make prudent decisions regarding how fees will be allocated among participants. While there is no current rule on how to allocate plan fees, fiduciaries should review how plan expenses are allocated every year to ensure that the allocation is in the best interest of all participants. This is not an area where fiduciaries will want to react to media attention or new regulations. Revenue Sharing One aspect fiduciaries should know is how revenue sharing has changed from the prior year. If there is a change, does it affect the  original arrangement? The 408(b)(2) fee disclosure requirement permits vendors to provide an estimate of record keeping fees; however, there is a lack of clarity in estimates. When fiduciaries understand all aspects of revenue sharing, then they can determine how to maximize the use of revenue sharing to benefit the plan and its participants. Services Another major reason to monitor vendors is to evaluate the services provided. Because there are numerous services launched every year by vendors, the evaluation process is perpetual to ensure the plan remains in the best interest of the participants. Questions that fiduciaries need to ask themselves are:
  • What additional service would actually benefit participants?
  • What services performed differently by the vendor could help the plan sponsor or save time?
  • Are the services that are expected actually being delivered? (Remember, promises made by a vendor are not obligations.)
  • Is the vendor up-to-date on best industry practices for record keeping, testing/reporting, and custody work?
Vendor When a record keeper’s system changes a retirement plan can undergo dramatic changes. The plan can also be greatly affected by a record keeper’s changes in personnel, or if it is acquired by another company. With proper vendor monitoring, plan fiduciaries can make proactive decisions about necessary improvements or changes to avoid future problems. Vendor Monitoring Objective #2: Have a consistent culture to improve the plan after the determination of reasonableness has been satisfied. It’s An Important Mindset With all that is at stake, it is essential that fiduciaries regularly monitor their vendors. While the retirement plan is the “deferred benefit”, there should be no deferring the oversight of the retirement plan vendors. Without performing proper vendor monitoring to fulfill their responsibilities, plan fiduciaries leave themselves open to risk, audit and litigation. In addition, plan fiduciaries will not be aware of significant improvements that can be made each year. In the end, the real reason fiduciaries need to be sure to monitor their vendors is because when a fiduciary makes prudent and proper decisions, the plan will be strengthened, and that ultimately benefits the participants. PCI’s archived blog entries are dated, the rules and statutes referenced may have changed. The analysis or guidance within these blog entries may have become stale, dated, or no longer accurate. PCI will not update or change these entries to reflect the latest analysis or development.


Chris Thixton, QPA, Principal



Read The First Chapter

Learn what it takes to build a successful retirement plan so your employees can retire on time and with dignity. A must read for any fiduciary.

We promise to never spam you or sell your information. For more, read our privacy policy or terms and conditions



A good plan measures
three key elements:
investments, and fees.


A good plan serves
employees and


Fiduciaries have a
responsibility to make
reasonable decisions
with their employees’
best interests in mind.

Ready to Evaluate Your Plan’s Performance?

How we can help


Speak with an adviser who can evaluate your plan in the three critical areas.


Understand how your current plan is performing.


Learn what you can do to improve your plan’s performance.