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Conducting a Vendor Search: Benefits & Best Practices Introduction Conducting a vendor search can be a detail-laden, time intensive process that takes up to six months to complete. If the vendor search results in the selection of a new vendor, the conversion can disrupt the norm and create anxiety. Why would a plan sponsor actually volunteer to do this? Aside from the fact that conducting a vendor search helps a plan sponsor discharge a portion of its fiduciary responsibility under ERISA, a properly guided vendor search should result in some or all of the following:
The benefits of conducting a vendor search substantially outweigh the potential short-term inconveniences. Applying some battle-tested best practices along the way will not only help mitigate those inconveniences, but also ultimately result in the selection of the most suitable vendor to the plan. This paper begins with a look at why conducting a vendor search may be necessary to satisfy several of a plan sponsor’s fiduciary duties under ERISA, followed by a discussion of the numerous practical benefits that result from a thorough vendor search. The second half of this paper will focus on twelve best practices that, if followed, will substantially alleviate the perceived burdens of conducting a vendor search and help guide the plan sponsor to a perfect-fit vendor.¹ Benefits of Conducting a Vendor Search Discharge of Certain Fiduciary Duties The Employee Retirement Income Security Act of 1974, as amended (ERISA), governs most conventional retirement plans and mandates that plan sponsors accept and discharge a relatively high degree of fiduciary responsibility with regard to the plan and its participants. Among the litany of its rules, ERISA either directly or indirectly requires a plan sponsor to perform multiple tasks with regard to the plan’s vendors. Perhaps the headliner among these vendor-related ERISA requirements is the duty to determine if the compensation paid to a “party-in-interest” is reasonable in light of the services being rendered. (ERISA defines parties-in-interest to include the plan’s service providers.) This means that plan sponsors must ensure the reasonableness of any fees charged to the plan considering the services that it receives from its vendors. By its definition, a determination of reasonableness implies some level of comparative study. In the context of retirement plan vendor fees, determinations of fee reasonableness are often informed by marketplace comparative fee analysis. Retirement plan fee benchmarking studies most typically take one of three paths:
The most basic type of fee benchmarking study looks at general industry data to approximate a fee range that the plan could expect if it solicited bids from vendors at large. The data used to inform such a study is often gathered from industry research institutions to which vendors and other professionals report fee information. Consulting firms that assist plan sponsors with fee benchmarking studies may also keep a database of proprietary information regarding vendor pricing ranges and trends. This type of very basic benchmarking study, however, does not consider the specific objectives and service requirements of a particular plan. Issuing a request for bid to a population of prequalified vendors injects an element of plan specificity and uniqueness to the fee reasonableness determination. The request for bid process incorporates certain plan specific information such as number of participants, plan asset levels, and plan design information. In summary, the request for bid process entails issuing a request for bid to a defined population of vendors, receiving and analyzing the bid specifications received from vendors in response to the bid request, and comparing the bids received to the current fee structure. In additional to helping them make fee reasonableness determinations, plan sponsors often use the request for bid process to negotiate lower fees with their current vendors. The ERISA-mandated determination of fee reasonableness must also consider the services that are being rendered by the vendor to the plan. Fee benchmarking studies and requests for bids are not designed to probe vendors about how they would address the plan’s specific servicing requirements. Therefore, plan sponsors often decide to engage in a more comprehensive vendor search process that is custom tailored to the circumstances, objectives and service needs of the particular plan. By undertaking a full-blown vendor search, plan sponsors are able to assess the reasonableness of fees, and consider the reasonableness of fees in light of the plan’s particular objectives and needs. The request for proposal process typically involves three phases:
During the preparation phase, the plan sponsor typically starts the vendor search process by determining its objectives in conducting the vendor search. Sometimes plan sponsors organize participant focus groups to solicit feedback about current and desired plan services from the participant’s perspective. This feedback is then used to help shape the search objectives. Example search objectives include:
Once the search objectives are established, the plan sponsor prequalifies the vendors who will be invited to propose. A thorough vendor prequalification entails a preliminary evaluation of the entire marketplace to arrive at a list of vendors that have the basic capabilities required by the specific plan. This baseline step is important because most vendors have defined their business and service models to suit the needs of certain types and sizes of retirement plans with certain features. A 401(k)-only service provider, for example, would not make a good selection for a 403(b) plan sponsor’s prequalified vendors list. Other factors, such as the plan sponsor’s current relationship with the vendor (if any), the vendor’s reputation in the marketplace, the vendor’s asset transfer requirements, and the plan sponsor’s search objectives tend to influence the plan sponsor’s prequalification decisions. Prequalified vendor lists usually include the current vendor and run six to ten vendors deep. The following additional tasks are completed during the preparation phase of a vendor search:
The customized request for proposal includes a questionnaire covering all desired service components and capabilities. It also reports meaningful demographic, design, investment and asset data to assist prequalified vendors in proposing exactly how and at what cost it would deliver its service offering to the plan. During the analysis phase of a vendor search, prequalified vendors draft their proposals, which are then carefully reviewed and analyzed with the plan sponsor’s search objectives in clear focus. The capabilities and solutions proposed by each vendor are compared head-to-tail across the board. Determining the proposal evaluation criteria and creating a comparative vendor scorecard can help ensure a comprehensive apples-to-apples comparison of the vendors’ offerings. Once proposals are reviewed and compared, the plan sponsor typically selects three to four finalists from among the candidate pool. The finalists represent the proposals that best address the plan’s unique objectives and overall circumstances. Finalists are typically given another opportunity to present the highlights of their offering in person at the plan sponsor’s location. The analysis phase concludes with the selection of the plan’s vendor. The final phase of the vendor search is the conversion phase, which can require up to three months to complete. During this phase, the plan’s investment option lineup is selected, service agreements are negotiated, plan assets and data are transferred to the new vendor, and the plan sponsor’s fiduciary duty to determine if the compensation paid to a service provider is reasonable in light of the services being rendered is discharged. Other fiduciary responsibilities and tasks that may be discharged as a result of a request for proposal project include:
Other Benefits Conducting a vendor search comes with a multitude of benefits beyond the satisfaction of certain fiduciary responsibilities. Several of these additional benefits are highlighted below:
Vendor Search Best Practices The twelve best practices listed below have helped plan sponsors minimize the inconveniences and potential disruption that are sometimes associated with conducting a vendor search.
Conclusion ERISA clearly imposes a fiduciary duty on plan sponsors to prudently select and monitor the plan’s vendor and ensure that the fees charged to the plan in connection with the vendor’s services are reasonable. Conducting a vendor search every three to five years helps the plan sponsor satisfy these responsibilities. While the vendor search process may initially seem burdensome, following a few best practices can mitigate the inconveniences, and the benefits quickly overwhelm the burdens. Multnomah Group, Inc. Copyright 2011. Multnomah Group, Inc. All Rights Reserved. ¹ This White Paper is not intended to be legal advice and should not be construed as such. Information relayed herein is representative of the Multnomah Group’s experience and current understanding of the law. While the Multnomah Group has made every reasonable effort to ensure that the information contained herein is factual, we do not warrant its accuracy. Additionally, this White Paper does not embody a comprehensive legal study, but rather reflects the information most often sought by our clients. As the information contained herein is general in nature, you are urged to contact your legal adviser with specific questions related to your plan.
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