Conducting an RFP for your 401(k)/403(b) service providers can be an onerous process. But it’s a very necessary one.
As a plan fiduciary, one of your obligations is to monitor service providers and fees. In fact, in the event of a DOL audit, you will be asked about any RFPs or benchmarking exercises you have completed for the plan.
Typically, for our clients, we take them out to bid for an RFP every 3-4 years depending on the size and complexity of the plan. And we provide fee benchmarking information annually.
When you are considering an RFP for a record keeper and an advisor at the same time, we recommend using an independent search firm that specializes in RFPs but does not perform any of the services you are seeking. If you are just searching for a record keeper, your advisor can usually assist with that endeavor.
For this article, let’s focus on what to look for when searching for a new advisor.
1. FIDUCIARY STATUS
One of the reasons you should hire an advisor is to offload fiduciary liability. When advisors respond to the RFP, make sure they indicate their fiduciary status in writing. A 3(38) fiduciary will assume the liability for selecting and monitoring investments, while a 3(21) will just provide guidance and recommendations. Hiring a 3(38) will remove that liability from your plate.
2. AVOID ONE-TRICK PONIES
Does the advisor responding to the RFP provide more than just investment services? Retirement plans have become more complex over the years, and if you are working with an advisor that only handles investments, you are getting short changed. While we do serve as a 3(38) fiduciary, investments are only about 30% of what we do for our clients. Other services you should look for include: individual participant advice, financial wellness solutions, plan design/compliance expertise, fiduciary training, and substantial industry experience. It can be tempting to choose the lowest cost advisor responding to the RFP, but they may be the lowest cost for a reason. Always request a list of services to see what you are paying for.
3. BROKER VS ADVISOR
These two terms are not synonymous. A broker is regulated by FINRA and is held to a suitability standard when dealing with clients. A Registered Investment Advisor (RIA) is governed by the SEC and is held to a fiduciary standard in all client dealings – meaning all advice provided is provided in the best interest of the client. In addition, the only firms that can serve as a 3(38) fiduciary are banks, insurance companies, and RIAs.
4. FEE STRUCTURE
How will your advisor get paid? Do they collect commissions from the investments? Do they charge an asset-based fee, a hard dollar fee, or some combination thereof? Just make sure you understand this before you enter into any agreements. It’s also worth asking how their fee will change as your plan grows.
5. TARGET DATE FUND SELECTION PROCESS
Target Date Funds (TDFs) hold most of the assets in retirement plans since they are usually the Qualified Default Investment Alternative (QDIA). As such, the DOL recommends that plan sponsors and fiduciaries take extra care in selecting a TDF suite for the plan. Ask about the advisor’s process for selecting TDFs, or if they have other options to satisfy the QDIA. Simply selecting the TDFs that are also managed by the plan’s record keeper is not a process.
6. REVENUE STREAMS
Unfortunately, some brokers, as well as some advisors, view retirement plan participants as a golden goose. In such cases, they will cross-sell other products and services to add revenue for themselves. They may even recommend expensive managed portfolios that generate extra income for the advisor. Make sure all conflicts are disclosed along with other services they could potentially derive revenue from.
While this is not an exhaustive list, making sure you understand these six keys can be a huge boost in cutting through the noise of the many responses you will very likely attract.