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Now is the time: Questions to ask when reviewing service providers

July 16, 2012


Many retirement plan sponsors consider converting to new providers starting with the new plan year. For calendar year plans, the new plan year begins on Jan. 1. To be ready for that date, now is the time to examine service providers and decide whether to make a change. What should you look for? Here are some guidelines.

Basic provider questions

Generally, look for providers that have experience in the industry. Check to see what types of clients they typically serve and if they have clients with plans similar to yours. Request references from plan sponsors of similar plan sizes and who’ve had positive and negative experiences with the provider.

Service and administration should be easy, and communications clear. Reports from your provider should be timely and accurate. You shouldn’t have problems contacting your service provider, and they should give quick and accurate answers to routine questions.

Look for a provider that offers educational seminars for employees to help them understand the importance of maximizing their savings. It may be easier to arrange seminars if the service provider is a local company. Make sure the provider has a website that your employees can access, and that participant statements and reports are user-friendly.

The provider should give ongoing plan review. This includes open discussion of participation levels, deferral percentages, loans, nondiscrimination testing, and enrollment and communication strategies.

Cost considerations

One important consideration for all businesses is cost. But remember that cheapest isn’t always best. Certain providers market their services directly to plan sponsors with the idea that the cost of an advisor is unnecessary. Generally, this type of arrangement works only if the plan sponsor has an employee dedicated to certain 401(k) plan functions, or the plan accepts less service.

The 401(k) fees paid by a company typically include a one-time fee to establish the plan and an ongoing annual, quarterly or monthly fee to manage the plan. The costs cover record-keeping, support from an account manager, government-required testing and tax forms, and product and service improvements. The administrative costs vary dramatically based on the provider and the total plan assets. Some providers will minimize, or even eliminate, administrative costs as the plan balance grows.

It’s important that your employees pay the least fees possible so they can invest more of their money. Add up the average fund expenses plus the management fees, participant record-keeping fees, custodial fees or any other fees charged to your employees.

Generally, a reasonable fee for a plan with 25 or fewer employees is $1,000 to $2,000 annually for plan administration. As the plan grows to $1 million or more in assets, your fees should be 25% to 30% less.

Plan design questions

Your provider should be able to create a plan that meets your company’s current needs. For example, are you getting the desired level of participation in your plan from your employees? Is the plan designed to reward and retain your most valuable employees?

When considering your plan design, does your plan provider offer procedures for keeping you informed of the latest legal requirements and IRS regulations? As your business grows over time, will the provider have the services and options you’ll need?

It’s time to decide

Don’t forget about blackout periods. You need to consider how long it’ll take the outgoing provider to give the records to the successor, and the ability of the new provider to load the data into its system, check it, and disseminate the information to the sponsor and participants.
Service providers can help you run your retirement plan smoothly and efficiently. Considering some of these questions now will help you determine if you’re ready to make a change at the end of the plan year.

Service providers and your fiduciary duties

Plan sponsors can employ an investment advisor to manage the investments according to agreed-on investment goals, such as investment performance and diversification. Hiring an investment fiduciary may also reduce your fiduciary responsibilities. If you use an investment manager that is a bank, insurance company or registered investment advisor, you’re responsible for the manager’s selection, but you’re not liable for the manager’s individual investment decisions.

Try to find a provider that will manage your business’s investment roster so you don’t spend your own time reviewing fund performance and costs to make sure that they’re prudent and in the employees’ best interest, and that the investments are diversified to minimize the risk of large plan losses. The provider should offer your employees information on investment options, portfolio managers, fund objectives and fund performance and provide you with an annual performance analysis of plan investments.

All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a Clark Schaefer Hackett professional. Clark Schaefer Hackett will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.


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