While plausible arguments can be made for including a higher-cost share class on a 401(k) menu, for eschewing CITs and separately managed accounts in favor of mutual funds, and even for going with a money market fund over stable value, there’s one aspect of the wave(s) of retirement plan litigation that I will never understand.
That’s the apparent reluctance to actually undertake a formal request for proposal (RFP) to evaluate the fees and services currently offered to the plan.
I see it alleged time and again in these lawsuits — even in the relatively few situations where an advisor is referenced. Even among these multi-billion dollar 401(k) plans — and, mind you, that’s pretty much been the exclusive focus of these lawsuits — plans are going years, many years in some cases, without any apparent move to actually shop around and see if there is a better deal to be had.
Now, I get that the plan’s current providers already ensconced, perhaps for years, can hardly be expected to champion the need for a regular review of (their) fees and services. The best ones will benchmark their deliveries against their service commitments to the plan, of course — but against the entire marketplace? Not likely.
That said, short of a formal process — without the discipline of a formal RFP and the guidance of a trained and experienced professional — I’m not sure how, particularly in this day and age, a plan fiduciary can even begin to know if your plan is getting a good deal or not. And clearly, at least based on the allegations made in — well, pretty much every single one of these lawsuits — there’s at least a reason to wonder.
So, what should you expect to get from a formal RFP?
Plan design ideas. Many providers will come in with a bid based on their understanding of the current plan and how it operates. They are aware that plan changes can be a sensitive matter, often requiring the involvement of legal counsel, and so may not proactively suggest changes. They should, however, be encouraged to provide at least one substantive recommendation — both to demonstrate the intellectual acuity of their team, and their depth of understanding of your current plan design.
A fresh look at the fund menu. Open architecture is very much the order of the day, so much so that you might well find that a recordkeeper/platform change would require only a modest amount of fund changes, if any. That said, this could be the opportunity to look at different fund classes — or fund types — particularly if the plan — and the plan assets — has grown significantly since the last time these issues were considered.
An opportunity to think/rethink your target-date fund choice. It’s still pretty common to have the plan’s target-date fund choice driven by the choice of provider, whether or not it happens to be that provider’s proprietary offering. While these options typically have names that are awfully similar, there are considerable differences in glide path, fees and structure (a point made in at least one of the lawsuits brought to date). In view of the critical role these funds typically fulfill as a default option — and particularly if it’s been a while since you’ve considered this choice — this would be a good time to revisit and/or reaffirm that choice.
Another shot at re-enrollment. While a growing number of plans have embraced automatic enrollment, most haven’t, and among those who have, most have thus far been inclined to apply it only to those hired after the adoption date. There are reasons for that, but in many cases it seems to be little more than a concern about disrupting the status quo for workers who have previously failed to take action to fill out a form and begin participating in the plan. If you’re going through the disruptions attendant with any change in plan providers, it can also be a good time to give those non-participating workers another shot as well.
Updated fee quote. Yes, there’s a 401(k) averages book, but there is no real “blue book” for 401(k) plan fees. And while some of the lawsuits purport to characterize certain fees and fee structures as “normal,” there are often particulars about an individual plan (particularly large programs that have had to absorb and assimilate other related plans during the course of their existence) that cannot be neatly compartmentalized, from a fee or operational standpoint. Oh, and you just might find that your current provider is interested in “sharpening their pencil” on the fee structure you’ve been operating under.
Better sleep at night. There’s no guarantee that undertaking an RFP will provide comfort. Indeed, it may well engender increased concerns, certainly in the short-term. And yet, short of that process — whether you make changes or not — how else can a prudent fiduciary fairly claim to have ascertained that the services rendered — and fees paid for those services — are, in fact, reasonable?
