A Word About RFPs: Request For Proposal

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Overview

Prudent employers conduct quarterly meetings to review the investments available under a 401(k) plan, including the investment return and internal expense ratios. However, recent litigation should be motivating most employers to go beyond the current financial reviews and conduct request-for-proposal projects to review all services and fees associated with their retirement plans. This motivation comes from this year's Supreme Court ruling regarding 401(k) fees in LaRue vs. DeWolff, Boberg & Associates, which found that plan participants now have a direct cause of action against retirement plans for losses that may be incurred by a participant. These losses may include situations in which plan fees exceed reasonable amounts.

Considerations

When determining whether to conduct an RFP project, employers should consider how long they have worked with their existing recordkeeper and investment provider, how and when the incumbent was selected, and overall satisfaction with recordkeeping services and investment performance. Even if employers are satisfied with existing services, they still would be well served by an RFP project to obtain current market data and to confirm that fees are reasonable.

Due to the significant increase in retirement assets over the past several years, recordkeeping fees retained by service providers may exceed reasonable fees charged by other service providers for comparable plans. Therefore, employers should review the relationship and fees with incumbent recordkeepers and investment advisers.

RFP Process

When beginning an RFP, employers may wish to minimize expenses and conduct the project internally. This usually results in informal phone calls to several professionals. Unfortunately, when an employer requests proposals without providing consistent information to all vendors, it is difficult to compare the proposals. Some entities determine fees based on mutual fund investments. Other entities propose fees based on total assets, including employer stock and loans. Still other recordkeepers use the old-fashioned method of charging a per participant fee. Regardless of the manner in which fees are determined, these procedures generally are helpful in conducting an RFP:

Identify candidates. Identify appropriate service providers based on the number of active participants, former participants, average account balance, total assets in the plan and demographics of an employer's population. Services and fees will vary significantly based on these factors.

Obtain proposals from four to eight service providers, based on the size of the plan. However, for employers with relationships with multiple institutions, it often is more cost-effective to provide a proposal to all potential candidates in order to avoid having entities second-guessing an employer after the RFP process is completed.

Use A Standardized Approach

Issue an RFP package. Prepare a comprehensive letter explaining the history of a plan, status of plan documents and goals. Employers should identify current investments, total plan assets, allocation of assets, anticipated annual cash flow of employee contributions, matching contributions and other employer contributions.

The number of active and former employees, participants without account balances and loans also should be identified. Detailed information provided in a consistent format to all candidates will ensure consistency in evaluating proposals.

The RFP package should contain a questionnaire of all important issues and require all candidates to submit information in a designated format. Receiving information in a consistent format will ease comparisons. Although employers will not make a final decision based on subtle issues - such as cost to prepare a Form 5500, QDRO fees, loan fees or distribution fees - comparing the fees charged by different candidates will give employers a better sense of which proposal might have hidden charges.

Set A Deadline

Establish a timeline. Before the RFP package is mailed to candidates, establish a comprehensive timeline for issuing proposals, requesting responses, compiling proposals, reviewing proposals and selecting final candidates, conducting candidate meetings and selecting a finalist. By establishing a timeline at the beginning, employers will have a better chance of completing the RFP in a reasonable timeframe.

Analyze fees. A critical component of every RFP is to evaluate the total cost to operate a plan. Due to the increase in retirement assets, most large employers receive a no-cost 401(k) proposal. Recordkeepers are willing to retain internal fees paid by the mutual funds (i.e., 12b-1 fees) for their services, rather than charging a per-participant fee.

In general, fees have declined significantly in recent years. It is not uncommon for an employer, prior to an RFP, to be paying approximately 90 basis points (.90%) on plan assets. After conducting an RFP, fees may be reduced to .60% or less. For a plan with approximately $100 million in assets, a drop from .90% to .60% will result in $300,000 in savings.

Select final candidates. Finalists should be selected based on the fees presented, services, internal and external costs, and perception of quality of recordkeeping services, investment advice to participants, communication, enrollment, eligibility, vesting and distribution services. The ability to handle unique plan provisions also is important.

If employer stock is an investment alternative, different issues will arise. Satisfaction with the incumbent service provider is a factor in selecting finalists.

Review And Analyze

Conduct finalist meetings. After selecting finalists, conduct in-person meetings to meet the person who will support the recordkeeping and investment team. It is important to identify specific individuals who will be assigned to an employer, rather than relying on general representations. Employers should develop a list of questions for all candidates to identify the strengths and capabilities of each provider.

Select a finalist. Employers must determine whether to stay with their existing service provider or to change service providers based on an evaluation of internal fees, external fees and the quality of service. Employers may decide to select a finalist that is not the lowest bidder; this is OK. However, in this situation, employers should document the rationale for their decision.

Plan Conversion

Manage the conversion process. If selecting a new service provider, employers must carefully map out the conversion process. Errors in recordkeeping can be identified. This presents a perfect opportunity for employers to consider correcting any improper issues under the IRS Voluntary Compliance Program or the Department of Labor's Voluntary Fiduciary Compliance Program.

If a firm has not evaluated plan fees in more than three years, an RFP can achieve savings and obtain better overall service levels and service commitments.

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