Reviewing Providers

Art by Jing Wei

Retirement plan advisers can add value for their clients by reviewing plan providers regularly. Through this practice, they can make sure a provider meets all the needs of the plan and its participants, plus maybe find an opportunity to negotiate plan fees. In the process, they may learn things that help their own business model, as well.

Kathleen Kelly, managing partner at Compass Financial Partners, in Greensboro, North Carolina, says her firm takes a disciplined approach to provider reviews.

“We do an annual fee benchmark for all clients. It validates that fees are in line, reasonable and commensurate with services provided,” she says. However, fees are only half the conversation, so Kelly also looks at how well the plan design and provider suit the plan’s demographics. Plans have changing demographics, she points out. “We look at doing a request for information [RFI] or request for proposals [RFP] even if things seem fine,” she says. “It helps plan sponsors understand what is available in the market—services and deliverables that have changed over time.”

Compass recommends a formal review of recordkeepers every three to five years. “Obviously, if there are issues or challenges with services or fees, we look at the market sooner,” she says. Corporate changes such as a merger or acquisition may also drive a more frequent review.

Kelly says her firm works with close to 20 providers. However, most of its clients are concentrated among half of those. “While we remain agnostic and don’t change new clients’ recordkeepers for the sake of placing them where we have a larger relationship, the bell curve of our clients’ recordkeeping relationships is similar to [that] of the market in general,” she says.

She adds that having clients with different recordkeeping partners provides leverage for negotiations, along with improving her firm’s understanding of available capabilities and resources. Compass can then better advocate on clients’ behalf, as well as better identify the “best-fit” partner during a recordkeeper search. “We regularly parlay experiences with one vendor to [help us problem-solve with] another—a recent example is a large recordkeeper that had moved away from paper enrollments. We had on-site education planned for a client’s manufacturing facilities where web usage is very low. Due to success we had with other clients, we were able to persuade this recordkeeper to come prepared with quick-enroll cards that required only a participant signature to enroll in the plan, and it was a tremendous success!” she says.

Kelly thinks a separate review of investment managers is necessary. If investments are poorly performing, advisers can help retool the plan’s lineup so plan sponsors have one that is defendable. She suggests that, when searching for a recordkeeper, plan sponsors should have the investment lineup finalized. That way, when they go to market, they can evaluate whether a recordkeeper can accommodate those investments and price accordingly.

This also ensures that the choice of a recordkeeper’s proprietary investment product does not skew fees, she adds.

It is somewhat common, she explains, for a recordkeeper that is also an asset manager to provide pricing reflecting inclusion of its proprietary investment products—e.g., target-date funds (TDFs), stable value funds, etc. This practice allows fees to be significantly lower, as the manager benefits from revenue its investments generate in the plan.

“To ensure that all proposals are, in fact, ‘apples to apples,’ ideally we prefer to have the request for proposals [RFP] fees be reflective of a finalized investment menu, or at least based on a completely open architecture lineup so the recordkeeper cannot slot proprietary investments in order to make its recordkeeping fee more attractive,” she says. “It’s important for investment decisions to be independent of recordkeeper selection.”

Plan Sponsors’ Unique Needs
Jim Phillips, president of Retirement Resources, in Peabody, Massachusetts, notes that sometimes advisers and plan sponsors use standard RFI or RFP templates from industry groups such as The SPARK Institute Inc., without tailoring them to a plan sponsor’s specific situation. “This is not giving the plan sponsor an idea of whether the provider can handle its plan in a specific way,” he says.

Kelly agrees that many capabilities—and probably the most important ones—are inadequately probed for by way of a template-RFI or -RFP approach.

Each plan is unique in some respects, Phillips stresses. For instance, a plan may have payrolls on different cycles, different eligibility periods for different classes of employees, or participants who move in and out of the country. “Probably the most important thing is whether the provider candidate can handle the unique needs of a specific plan,” he says.

Uniqueness is typically demographic or operational in nature. Employers usually are familiar with demographic uniqueness, such as having an unusually young or old employee population, an unusually high or low average education level, or a large number of workers with visas or other immigration considerations, Phillips says.

For operational uniqueness, such as that relating to payroll issues, Phillips says, “an adviser can uncover [it] through a discovery process—having discussions with human resources [HR] and finance, examining plan documents, reviewing any compliance issues, talking with current service providers—and then review [them] with the client,” he says.

Or a hospital may have a 403(b), 457(b), 457(f) and a defined benefit (DB) plan. Phillips says, if the hospital wants to get all that reporting to participants on one platform, it must ask about that capability in the RFP. He adds that an adviser could do separate RFPs for each plan, then see if one provider could take a data feed from a second provider and include that information on its reporting systems; more commonly, though, one RFP for the combined business would be issued, to benefit from the economies of scale.

Phillips also suggests using open-ended questions, “asking a service provider, ‘What additional information do you need from us to give a comprehensive proposal?’ then analyzing its response.” This can help plan sponsors determine the vendor’s level of interest in working with it as a client, he says.

Compass’ RFP allows recordkeepers to expand on and give unique perspectives about what differentiates them. “It takes more effort to evaluate an essay answer rather than a ‘yes’ or ‘no,’ but it gives plan sponsors a better idea of what it would be like to work with that recordkeeper and how it views its uniqueness and innovation,” Kelly says. “It also allows us to evaluate what the relationship will be with the client. It’s more work on our part, but we will be able to identify what provider may be a better fit relative to the client’s needs.”

Learning What Plan Sponsors Want
Phillips says, for the adviser, the search is about setting goals and asking what products or services the plan sponsor would actually utilize. Then, go with the most effective solution at the best value, whether this is the incumbent or a new provider. “Naturally, everyone wants to get good value, with a focus on reasonable fees and transparency of fees,” he adds.

As Kelly puts it, plan sponsors want a responsible, knowledgeable service team—one inspiring confidence that their firm is executing its duties well and is meeting compliance standards.

In more specific terms, sponsors want recordkeepers that can deliver on outsourcing of loan and hardship approvals, handle qualified domestic relations orders (QDROs) and monitor eligibility, she says. “Clients are also asking about how the recordkeeper has been able to move the needle for clients like them using technology and innovation,” she says.

Additionally, plan sponsors expect providers to have an efficient means for handling routine payroll contributions and census data—an automated file transfer process, according to Phillips. They want service providers to take care of regulatory notices required for informing participants about plan features such as automatic enrollment, qualified default investment alternative (QDIA) usage and fee disclosures. And they want them to perform discrimination testing and complete the annual Form 5500. For the latter, they expect recordkeepers to collect all pertinent data over the year, to avoid having to spend extra time filling the form out later.

“Plan sponsors also want to know providers have their back,” Phillips says. For example, sponsors usually lack expertise in nondiscrimination testing. If their plan fails a test, they want assurance the provider can suggest testing alternatives. They want a provider that can explain whether to use the prior year’s data, in order to give highly compensated employees a heads-up about adjusting their contributions before year-end.

Furthermore, plan sponsors expect providers to have good call centers and web-based functionality, thereby giving participants an alternative to calling HR, Phillips says. This can represent a significant saving of the sponsor’s time. Finally, sponsors look for expertise in plan design—for a vendor that will have robust discussions with them over whether to make any changes to the plan, he says. Plan sponsors want guidance about how to handle issues as they arise.

Differentiators
According to Kelly, plan sponsors struggle with how to improve their plan and increase participants’ appreciation of it. “Just as the pace of change has escalated, we are seeing an interest in how to use technology to better meet the participants’ needs—particularly for retirement readiness,” she says.

One priority for her firm is helping plan sponsor clients differentiate how each provider approaches the Department of Labor (DOL) fiduciary rule. Will the provider be issuing education or advice for investments and distribution decisions? Will it use a third-party for these services? How have providers and advisers determined, from their business model, the best way to serve participants? “We are [encouraging clients to] focus on this when doing an RFP. It could represent a big change from the incumbent provider, relative to other prospective providers,” she says.

In terms of participant services, the biggest differentiator for a recordkeeper may be whether it has embraced financial wellness education or whether it factors outside assets into its retirement readiness equation.

What other resources do service providers offer participants? Budgeting, student loan help, debt help? Does the provider have aggregation tools to use in retirement readiness calculations? Also, Kelly says, plan sponsors want to know whether a provider delivers education through a vehicle that connects with its workers. Does it use gamification for Millennials? Does it still embrace paper communications for an older work force?

Compass believes the adviser and provider should periodically interact to help keep communications and services to the client at an optimum. “We survey our provider partners quarterly to ensure we understand their most current resources and programs, as well as changes to their organizations and/or service models—case in point, changes due to the fiduciary rule—and work together to determine how we can best partner to serve our mutual clients,” Kelly says.

In her firm’s service model, advisers typically manage the recordkeeper relationship. “We prefer to be the ‘quarterback’ of all things retirement for our clients. And they typically come to us first. In every case, we see the recordkeeper as a partner in the client relationship rather than as an ancillary service provider or adversary. We’re all working toward the same goal: better retirement outcomes for employees,” she says.

Recordkeepers have different approaches for measuring retirement readiness. Some provide a “plan health or wellness” indicator, which estimates the percentage of an individual’s pre-retirement income available once he retires based on his current participation decisions, Kelly notes. Often of greater interest is whether a recordkeeper can model the impact of plan design changes on retirement readiness. This capability often comes with a price tag, but it can facilitate a conversation between adviser and sponsor about any needed plan design changes.

“The biggest trend we see is employers asking us to help modernize their benefits programs,” says Steve Patterson, executive vice president of workplace investing sales, Fidelity Investments, in Boston. “There is growing demand for total benefits solutions [relating to] employee well-being, [taking a step beyond] financial wellness—in which we’ve seen great interest, adoption and engagement—to holistic solutions encompassing a person’s finances as well as his health, work and life.”

Patterson adds that Fidelity also observes employer interest in helping employees manage student loan debt, either through tools or possibly with an employer contribution program integrated into the company benefits platform. “Employers see this as a valuable tool for employee retention and as an advantage in recruiting new talent,” he says.

At the same time, as the market grows more competitive, employers have increasing expectations for what services they will receive, Phillips says. “This raises the bar industrywide. Most providers do a good job of [supplying] a comprehensive package of basic services, but others go above that, at a cost, all delivered in an efficient fashion.”

He says, if a recordkeeper provides full administration services, employee education, boots on the ground to offer employee meetings in multiple locations, robust data reporting and a determination of how effectively the plan puts employees on track for retirement, paying the higher cost to work with that type of provider is worth it.

Kelly points out that, depending on the size of the plan sponsor, her firm has noticed interest in the degree of customization a recordkeeper can provide—making written and web-based communications look and feel as if they come from the sponsor rather than the recordkeeper. “And they want to coordinate that with other benefits. They’re interested in having a more holistic benefits approach overall and whether the recordkeeper can accommodate that objective,” she concludes.

Key Takeaways

• It is important to review retirement plan providers, not just to ensure that their fees are reasonable but to see if they are serving the unique needs of a plan’s participant base.
  
  
• RFIs and RFPs can reveal new services that providers have developed.
  
  
• Advisers should include an open-ended question about what makes the service provider unique.