We are all pawns of the markets—and that’s a fact.

This statement might conjure up images of stock market gyrations akin to roller coasters riding waves of market prices in some Lovecraftian horror, but this is an overly simplistic conclusion. Everything has a price, whether it’s the groceries we buy or the retirement plans we run. Prices go up; prices go down. As fiduciaries, plan sponsors have been tasked by the Department of Labor to ascertain reasonableness on the fees they pay to service providers. But there’s the problem: In an environment of evolving fee structures, technological capabilities, and scalability, how does a fiduciary satisfy their duty to prudent cost management? How does one value service?

John Ludwig

Sometimes this task feels like a gambit between the swindler and the fool. But there are ways.

Benchmarking, for example, involves using a third party pricing-data aggregator that compares the costs of similar plans with similar services to percentile groupings. A concise report informs plan sponsors about where they stand in the marketplace. The problem with this method is that it may not completely be an apples-to-apples type comparison. Plan complexity or services outside the norm may explain being on the higher end of the peer group.

The next method is more involved: the Request for Proposal (RFP). Here, a fiduciary requests proposals from a number of service providers, often including the incumbent, and is able to break down the specific needs of their plan. As a result, plan sponsors must not only have a good grasp on the services that their organizations, participants, and plans require, but also how to divine those service providers that are capable of effectively providing those needed services. This is obviously easier said than done. Those utilizing RFPs and service quotes must do their due diligence to understand a service provider’s processes and procedures—from start to finish. An RFP is an opportunity to break down the services offered by vendor, and get a good grasp of the value they hold in the marketplace. However, don’t be fooled by a value trap. You don’t have to choose the cheapest option, but the most prudent one. Sometimes, cheap is cheap for a reason.

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"We are all pawns of the markets—and that’s a fact."

Don’t be afraid to leverage outside industry contacts to discover procedural best practices and insights. And as always, document every decision and the rationale behind it, as well as getting any service provider promises in writing as part of their proposal.

As fiduciaries, both pricing tools are vital. And truly, they should be used as a complement to each other over time. A rule of thumb would be to benchmark annually or biannually, and send RFPs every three to five years. Always remember the end goal, however: The provider and services must align with organizational goals and participant success. Your service provider does not need to be the cheapest available, as long as you understand and can justify the fees you’re paying in relation to the services rendered, and demonstrate a prudent evaluation process.

This information was developed as a general guide to educate plan sponsors, but is not intended as authoritative guidance or tax or legal advice. Each plan has unique requirements, and you should consult your attorney or tax advisor for guidance on your specific situation. In no way does advisor assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations.

Securities and Advisory services offered through LPL Financial, a Registered Investment Advisor. Member FINRA/SIPC.


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