Why Establish a Process for Evaluating Retirement Plan Vendor Performance?

Created by Kelly Knudsen, Modified on Thu, 5 Sep at 10:45 AM by Kelly Knudsen

Establishing a structured process to evaluate the performance of your retirement plan vendors is essential to ensuring the plan continues to meet fiduciary standards and operate effectively. Vendors play a crucial role in the administration, cost, and overall success of retirement plans, and regular evaluations can help you manage fees, improve plan outcomes, and protect yourself against potential legal liability. Below are some key reasons why setting up a robust vendor evaluation process is crucial.

Fulfilling Fiduciary Duties

As a plan sponsor, you are a fiduciary under the Employee Retirement Income Security Act (ERISA), which means you are required to act in the best interest of plan participants. Part of this responsibility involves regularly monitoring the performance and fees of vendors, such as recordkeepers and investment managers, to ensure that their services and costs remain reasonable and competitive. A documented, ongoing vendor review process demonstrates that you are fulfilling this fiduciary duty by actively managing the plan’s service providers [1].

Neglecting to evaluate vendors can expose plan sponsors to lawsuits for fiduciary breaches, especially if excessive fees or poor vendor performance reduce participants' retirement savings. Establishing a systematic process helps mitigate these risks, ensuring vendors deliver value while staying compliant with ERISA standards [2].

Enhancing Plan Outcomes

Vendors directly affect the quality of services available to plan participants, including investment options, communication materials, and transaction processing times. Poor vendor performance can hinder participants' ability to make informed decisions about their retirement savings or lead to delays in important processes like fund transfers or loan requests. By regularly reviewing vendor performance, you can identify areas for improvement or switch providers, ensuring better outcomes for plan participants and maintaining high service levels [3].

A regular review process also pushes vendors to innovate and stay competitive. For example, as technology and investment products evolve, vendors should offer solutions that align with the latest best practices to benefit participants. Evaluating vendors helps ensure they are meeting your plan’s evolving needs [4].

Managing Fees and Ensuring Cost Efficiency

One of the most important reasons to conduct regular vendor evaluations is to control fees. Over time, plan fees can increase without notice, and vendors may no longer provide competitive pricing compared to industry standards. Excessive fees can erode participants’ returns, and failing to monitor and manage costs may lead to potential fiduciary violations. By benchmarking fees and comparing vendors’ pricing against the market, you ensure that the fees charged remain reasonable and that participants are not overpaying for services [5].

A comprehensive evaluation process empowers you to negotiate lower fees, improve contract terms, or replace vendors if their fees are not in line with the value provided. Fee transparency is critical, and conducting these reviews regularly allows you to stay on top of cost-related issues before they become problematic [6].

Ensuring Regulatory Compliance

The retirement plan landscape is constantly evolving due to changes in laws, regulations, and best practices. Your vendors must stay compliant with the latest regulatory requirements, such as fee disclosure regulations, cybersecurity standards, and participant communication obligations. Regular evaluations provide an opportunity to confirm that your vendors are up to date on all relevant regulations, helping to reduce the risk of non-compliance that could expose your plan to fines or legal penalties [7].

Additionally, vendor evaluations should include a review of any new services or systems they’ve implemented to meet regulatory demands. This ensures that the plan remains protected against potential compliance failures or data breaches.

Supporting Proactive Decision-Making

A structured vendor review process provides plan sponsors with valuable insights for making informed decisions. Rather than reacting to issues like poor service or fee increases after they’ve become problematic, regular evaluations allow you to anticipate and address concerns before they impact participants. You’ll also be better positioned to decide whether to renew contracts, renegotiate terms, or replace underperforming vendors.

Ultimately, having a proactive approach in place strengthens your ability to maintain a well-managed retirement plan that serves participants effectively, while protecting your organization from unnecessary risks.

In conclusion, creating and maintaining a process for evaluating retirement plan vendor performance is a vital component of effective plan management. It ensures that you meet your fiduciary obligations, optimize plan outcomes, control fees, and remain compliant with ever-changing regulations. By regularly assessing your vendors, you safeguard the plan’s success and, most importantly, the financial well-being of its participants.

References:

[1] Plante Moran. (2022). Retirement plan vendor search and selection. Retrieved from https://www.plantemoran.com/explore-our-thinking/insight/2022/03/retirement-plan-vendor-search-and-selection
[2] Multnomah Group. (n.d.). Conducting a vendor search: Benefits and best practices. Retrieved from https://www.multnomahgroup.com/conducting-a-vendor-search-benefits-and-best-practices
[3] Pension Consultants. (n.d.). Why vendor monitoring of retirement plans is always essential. Retrieved from https://pension-consultants.com/why-vendor-monitoring-of-retirement-plans-is-always-essential/
[4] OneDigital. (2023). How to understand retirement plan benchmarking as a plan sponsor. Retrieved from https://www.onedigital.com/blog/how-to-understand-retirement-plan-benchmarking-as-a-plan-sponsor/
[5] SHRM. (n.d.). How to conduct retirement plan assessment. Retrieved from https://www.shrm.org/topics-tools/news/benefits-compensation/how-to-conduct-retirement-plan-assessment
[6] Stark Miller Financial Benefits Group. (n.d.). 401k/retirement plan vendor evaluation. Retrieved from http://www.starkmillerfbg.com/401kretirement-plan-vendor-evaluation
[7] Equity 401k. (2023). Smart choices: Navigating vendor selection and fees in 401k plans. Retrieved from https://www.equity401k.com/blog/smart-choices-navigating-vendor-selection-and-fees-in-401k-plans