By Tim Mezhlumov, director, advanced markets, 1st Global
Rules and regulations for qualified retirement plans seem to be ever-changing. On July 1, 2012, the U.S. Department of Labor (DOL) requirement for qualified plan providers to provide a disclosure of fees and services to qualified plan sponsors went into effect. According to the DOL, a qualified retirement plan sponsor has a fiduciary duty to “establish and follow a formal review process at reasonable intervals” to ensure that the provider is appropriate and the fees are reasonable based on the services provided. This development is prompting many qualified retirement plan sponsors to review their retirement plans and benchmark their plan providers.
Plan sponsors typically rely on financial advisors or retirement plan consultants to benchmark their plans and evaluate plan providers. So it is vital for advisors who serve the retirement plan marketplace to have an in-depth understanding of what must be reviewed.
Here are 10 factors that should be reviewed periodically to ensure you are working with a suitable retirement plan provider:
- Investment Options
Plan sponsors need to make sure that the funds in the plan’s lineup allow participants to design well-diversified portfolios. Adding asset-allocation and target-date funds can make this task easier for plan participants. Rates of return for specific investment options should be compared with the appropriate benchmark such as an index or fund manager peer group. Fund expenses should be compared with those of other funds in the same asset class or category.
- Plan Features
Plan features include participant loans, auto-enrollment, auto-contribution escalation, auto-rebalancing and brokerage windows. These features should be reviewed to ensure that they adequately meet the needs of participants. Some of these features, such as auto-enrollment, do not carry additional fees, while others, such as loans and brokerage windows, typically add costs to those participants who choose to take advantage of them.
- Level of Service
Service levels can vary depending on the plan provider. Some providers build their businesses around delivering high-quality service while other providers focus on keeping fees as low as possible. The latter typically means the plan sponsor should expect to take on certain additional responsibilities such as having to manually transmit data or print out hard copies of documents and statements. It’s important to assess both the needs of each plan sponsor and its sensitivity to fees to identify a suitable provider.
Plan provider communications need to be clear, concise and perceived as valuable by the plan sponsor. Some plan sponsors complain about the lack of communication from the existing financial advisor, plan provider or third-party administrator (TPA). But others complain about receiving too many communications from the plan provider. This noise can add confusion and anxiety regarding whether the plan sponsor is meeting its obligations, and it can even cause some plan sponsors to miss important updates because they have been conditioned to “tune out.”
- Website Capabilities
These may include Web demonstrations, access to account statements and performance reports, interactive retirement calculators, risk assessment questionnaires and information about plan investment options. Certain tools can help participants plan for successful retirement and manage their investments. These tools may include a retirement income goal tracker, online budgeting tools and personalized messages and reminders designed to drive key planning actions.
When employees understand basic retirement income planning and investing concepts such as diversification and asset allocation, they are more likely to participate in a plan. This greatly increases their chances of being financially secure in their retirement. Most plan providers have educational materials for plan sponsors and participants. Some providers offer sophisticated materials such as self-propelled and narrated presentations while others may only provide basic brochures and white papers. Typically, the larger the provider, the fancier the education materials.
- Plan Administration and Compliance
It is critical for plan sponsors to make sure that the plan is properly administered and in full compliance with all regulations. Fully bundled platform providers deliver these services along with recordkeeping. But when selecting an unbundled platform, plan sponsors will have to choose an independent TPA. While some independent TPA firms offer higher levels of service than the large national providers, others simply lack the resources to adequately service their clients. For that reason, it is important to pay special attention when selecting an independent TPA firm. The good news is that unbundled platform providers can typically recommend pre-approved independent TPA firms that have been vetted, which should make selecting a TPA much easier.
Recordkeeping services include tracking transactions such as salary deferrals and employer contributions, rollovers and distributions, loan initiations and payoffs, investment fund transfers, earnings allocations and salary deferral rate changes. Retirement plan providers utilize various recordkeeping systems to provide these services. State-of-the-art systems can deliver real-time access to plan and participant information, real-time transaction processing and on-demand reporting.
- Fiduciary Support
Plan sponsors are required to meet a number of fiduciary obligations and need help in understanding and meeting these obligations. Typically, the financial advisor or consultant’s role is to educate the plan sponsor, but plan providers may also offer fiduciary support services. Many plan sponsors and the owners or executives of these companies wish to transfer some of the fiduciary responsibilities to third parties. For example, an ERISA 3(21) fiduciary is a financial advisor tasked with advising the plan sponsor with selection, monitoring and replacement of investment options.
Starting July 1, 2012, all covered service providers including record keepers, TPAs and broker/dealers are required to provide a fee disclosure to plan sponsors. For existing plans, the fees may be shown as dollar amounts or percentages of plan assets or participant balances. For new (start-up) plans, this information is included in the proposals that service providers present to the plan sponsor during the selection process. Some basic math may be needed to calculate total fees charged by all service providers if an unbundled platform is chosen.
Selecting the right retirement plan provider can seem like a daunting task to plan sponsors. But by working with a qualified financial advisor or retirement plan consultant who can lead them through the process, plan sponsors can gain confidence and peace of mind that a suitable provider is chosen.
1st Global was founded by CPAs on the belief that accounting, tax and estate planning firms are uniquely qualified to provide comprehensive wealth management services to their clients. Each affiliated firm is provided with education, technology, business-building framework and client solutions that make these firms leaders in their professions through dedicated professional client relationships built around wealth management.
1st Global Capital Corp. is a member of FINRA and SIPC and is headquartered at 8150 N. Central Expressway, Suite 500 in Dallas, Texas 75206; (214) 265-1201. Additional information about 1st Global is available via the Internet at www.1stGlobal.com.