An employer’s selection of a third-party administrative services provider for its retirement plan is a fiduciary exercise. This means the process by which the employer reaches its decision must be prudently undertaken.
It is therefore imperative that advisers get their clients to pay close attention to the details of, and thoroughly document, the process it follows in selecting or changing its TPA. An employer should give special consideration to the following:
Request for a proposal: When changing TPAs, an employer should issue RFPs to several candidates. An RFP describes the services an employer is seeking for its retirement plan and requests a detailed proposal from a service provider. An employer can engage a consultant to assist with preparing RFPs and vetting potential service providers.
Services agreement: The services agreement sets forth the services that will be provided, the fees that will be charged, and the respective duties and obligations of the TPA and employer. The services agreement should be carefully reviewed before the employer executes it to make sure all services the employer needs are covered.
Such agreements typically favor TPAs and may include strict indemnity provisions, choice of law, jurisdiction for lawsuits, and unclear fee disclosures. Likewise, the services agreement frequently disclaims fiduciary responsibility by the TPA, which may not be what the employer expects.
Plan document: In many cases, a new plan document will be signed and this will often involve completing a new “Adoption Agreement.” The adoption agreement does not stand alone; it works in conjunction with a basic plan document that contains non-discretionary, but important terms on how to interpret the adoption agreement.
It is very easy to check the wrong box on an adoption agreement, so be careful and read the document thoroughly. Checking the wrong box will result is an operational error for the plan and in many cases may not be discovered for several years after the fact. Correcting these problems after the fact can be very costly.
Even though the TPA may complete a draft adoption agreement for the employer, the responsibility for making sure the adoption agreement is correct remains with the employer.
It is imperative to carefully review the new adoption agreement in conjunction with the basic plan document, typically with the assistance of legal counsel, to make sure that all of the provisions from the prior plan document and any new provisions are correctly incorporated into the new adoption agreement.
Understanding fees: The services agreement should set forth the TPAs fees and may state them as a percentage of plan assets, a flat fee, or a combination of both. A TPA may charge additional transaction fees or hourly fees for non-standard services.
An employer must understand the differences between fee structures when changing TPAs because fees can vary significantly from one TPA to another, often due to hidden fees.
An employer must scrutinize proposed fees because it has a fiduciary duty to determine that fees are reasonable based on the facts and circumstances.
Blackout periods and investment lineup changes: Changing TPAs typically requires changes to a plan’s investment lineup and/or requires a plan to go into a “blackout period” during which participants cannot make or change their investment and contribution elections. An employer must provide participants with advance notice of investment lineup changes and blackout periods.
An employer should not necessarily rely on the TPA to provide recommendations on the selection of the new investment lineup. Rather, the employer may want to engage an independent third party fiduciary to assist with this process.
Monitoring service providers: An employer must monitor a plan’s TPA, which requires the employer to review periodically the providers’ performance and determine whether the vendor’s fees are reasonable.
An employer should also periodically determine if additional services are needed or if any contracted services are unnecessary, underutilized, or not actually being provided. An employer should replace a service provider if and when warranted by the provider’s performance, fees or capabilities.
Monitoring and replacing service providers can be complicated. Employers should work with ERISA benefits counsel to ensure they are meeting their fiduciary obligations.
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