In the complex world of Defined Contribution (DC) retirement plans, the selection of service providers for custodial and recordkeeping services is a critical decision that can significantly impact the plan’s success. As a plan administrator, your fiduciary responsibility requires you to act in the best interests of the plan participants. This means ensuring that the service providers you choose offer the highest quality of service, are cost-effective, and comply with regulatory standards. There are a variety of key criteria to consider when selecting the right service providers and having a system in place to effectively evaluate your options is key to making informed decisions and ensuring your plan’s success.

WHY SELECTING THE RIGHT SERVICE PROVIDERS IS CRUCIAL

FIDUCIARY RESPONSIBILITY

As a plan administrator, you have a fiduciary duty to act prudently and solely in the interest of plan participants and beneficiaries. This includes the careful selection and ongoing monitoring of service providers. Failure to do so can result in fiduciary breaches, legal liabilities, and financial losses for the plan.

IMPACT ON PLAN PERFORMANCE

The quality of custodial and recordkeeping services directly affects the operational efficiency of the plan. Efficient service providers can enhance participant satisfaction, streamline administrative processes, and ensure accurate recordkeeping. Conversely, poor service providers can lead to errors, participant dissatisfaction, and increased administrative burdens.

REGULATORY COMPLIANCE

Compliance with the Employee Retirement Income Security Act (ERISA) and other regulatory requirements is non-negotiable. Reputable service providers are well-versed in the regulatory landscape and can help ensure that your plan remains compliant, thereby reducing the risk of audits and penalties.

Although only large plan filers are subject to annual audits by an independent accounting firm, all plans are subject to compliance with the Department of Labor’s (DOL) Rules and Regulations. By selecting reputable service providers you can not only streamline your annual audit but also reduce the risk that the DOL will come knocking. 

EVALUATING CUSTODIAL & RECORDKEEPING SERVICE PROVIDERS

Selecting the right service providers requires a thorough evaluation process. Here are some key factors to consider:

EXPERIENCE & REPUTATION

1. Industry Experience: Look for providers with extensive experience in managing DC plans. Experienced providers are more likely to understand the intricacies of retirement plans and offer tailored solutions.
2. Reputation: Research the provider’s reputation in the industry. Check for reviews, testimonials, and any history of legal or regulatory issues. Consider providers that provide a suite of services that will seamlessly integrate with existing systems to ensure maximum efficiency when it comes to managing your plan.

SERVICE OFFERINGS

1. Comprehensive Services: Ensure that the provider offers a full suite of services, including custodial, recordkeeping, compliance support, and participant education. In certain cases, plans can engage a third-party administrator or advisor through a service provider to register as a fiduciary which will provide the plan with additional assistance with ongoing compliance matters.
2. Technology & Integration: Evaluate the provider’s technology platform. Modern, user-friendly technology can enhance the participant experience and streamline administrative tasks for the plan administrator through integrations with existing banking and payroll platforms.

COST & FEE STRUCTURE

1. Transparency: The provider should offer a transparent fee structure with no hidden costs. Understand all fees associated with their services, including transaction fees, management fees, and any additional charges.
2. Cost-Effectiveness: Compare the costs against the quality of services provided. The cheapest option is not always the best; focus on value for money.

CUSTOMER SERVICE & SUPPORT

1. Dedicated Support: Ensure that the provider offers dedicated account managers and customer support teams to assist with any issues or queries.
2. Response Time: Evaluate their response time and availability. Efficient customer service is crucial for addressing participant concerns promptly.

COMPLIANCE & SECURITY

1. Regulatory Compliance: Verify that the provider complies with all relevant regulations and has a strong track record of maintaining compliance.
2. Data Security: Assess their data security measures to ensure the protection of sensitive participant information. Look for providers with robust cybersecurity protocols and regular audits.

PERFORMANCE METRICS

1. Accuracy: Evaluate the provider’s accuracy in recordkeeping and transaction processing. Errors can lead to significant issues for both administrators and participants.
2. Timeliness: Assess their ability to meet deadlines and process transactions promptly. Delays can cause frustration and financial implications for participants.

REFERENCES & REVIEWS

1. Client References: Request references from current or past clients. Speaking directly with other plan administrators can provide valuable insights into the provider’s performance.
2. Independent Reviews: Look for independent reviews and ratings from industry analysts and publications.

THE EVALUATION PROCESS

REQUEST FOR PROPOSAL (RFP)

Issuing a Request for Proposal (RFP) is a structured way to gather detailed information from multiple providers. It allows you to compare different providers based on consistent criteria and make an informed decision.

SITE VISITS & DEMOS

Conduct site visits and request demos of their technology platforms. This hands-on approach can provide a clearer understanding of their capabilities and service quality.

CONTRACT NEGOTIATION

Once you have selected a provider, negotiate the contract terms carefully. Ensure that the contract includes Service Level Agreements (SLAs), performance benchmarks, and exit clauses.

ONGOING MONITORING

The evaluation process does not end with the selection. Regularly monitor the provider’s performance against the agreed-upon benchmarks and conduct periodic reviews to ensure continued alignment with your plan’s needs. In addition, request a Service Organization Controls (SOC 1) report on an annual basis and perform a detailed review. SOC 1 reports not only provide insights into the controls and operations of the service provider but also provide a section for complimentary user entity controls which should be implemented by the plan administrator to ensure a robust control environment.

OUR TEAM IS HERE TO HELP

Selecting the right service providers for your plan is a critical task that requires careful consideration and due diligence. The right providers can enhance your plan’s efficiency, ensure regulatory compliance, and ultimately improve participant satisfaction. By properly evaluating your options, you can make informed decisions that align with your fiduciary responsibilities and the best interests of your plan participants.

Mercadien’s Employee Benefit Plan Audit Group has extensive experience with plans of all sizes and structures, and we have worked closely with our clients to help navigate various changes over the years. Contact us today to learn more about best practices in evaluating your service providers and the benefits of making selections most advantageous to your plan.

DISCLAIMER: This advisory resource is for general information purposes only. It does not constitute business or tax advice and may not be used and relied upon as a substitute for business or tax advice regarding a specific issue or problem. Advice should be obtained from a qualified accountant, tax practitioner or attorney licensed to practice in the jurisdiction where that advice is sought.