By Allison Brecher, General Counsel, Vestwell
The new year is a great time to take stock of your company offerings and, for plan sponsors, that should include a thorough review of your retirement plan. With fiduciary duty on the line, not taking the time to carefully review and make any changes can be a costly mistake. But how do you know when it may be time to pull the plug and switch providers, rather than just make tweaks to your plan? Here are some things to keep an eye out for.
Your service provider is not proactive about compliance and/or charges extra to keep your plan compliant
Tax savings is often a main driver for offering a retirement plan, but your plan can lose its tax qualified status and fiduciaries can become liable for potentially significant penalties if your service provider falls short on compliance. Is your recordkeeper proactively monitoring your plan and complying with the legal and regulatory requirements? Or does it only get involved after an issue arises, which can be years later and typically more time consuming and costly to correct? Does your provider review your plan documents for compliance with changing regulations and prepare any necessary amendments? Or do they alert you to regulatory changes and leave the rest in your hands?
Your service provider does not have adequate data security protections
Think about the kind of data your service provider has on your employees and then think about what can happen if that data gets into the wrong hands. A data breach can put your employees’ personal information at risk, create strained relationships with your workforce, and expose company fiduciaries to liability. It’s important to know how your service provider protects your employees’ information and what it will do when something goes wrong. Most importantly, your provider should:
Have information security protocols in place that have been independently tested and verified by outside experts. In particular, your provider should encrypt all of your employees’ data and store it securely at all times.
Stand behind its procedures by agreeing to pay for and handle instances when data becomes compromised.
Be willing to report any data security incidents to you within 24 hours.
Have cyber coverage to make sure your company is protected and that the amount of coverage is sufficient.
Always be able to restore employees’ data and accounts with minimal or no downtime and disruption. Especially in the current volatile market, your employees should be able to access their accounts 24/7.
Your provider’s fees are unreasonable
It is critical to dig into the details of your recordkeeper’s fees, especially in light of the numerous class actions where plan sponsors and fiduciaries are being sued for operating a plan with allegedly excessive fees. You do not need to select the least expensive provider, but you do need to make sure the fees are reasonable for the services provided. Some things to look out for include:
Fees that are disguised by being included with mutual fund expenses – – sometimes in the proprietary funds offered by affiliates of your recordkeeper – – that are then kicked back to the recordkeeper. Make sure your provider has disclosed all such conflicts of interest.
Services that cost extra, since some providers will charge sponsors for things such as compliance activities and plan document reviews.
Fees that are reasonable in comparison with others. However, you cannot know for sure whether a service provider’s fees are reasonable until you ask and shop around. You can do that by getting proposals from other providers or benchmarking their fees. If you determine that your provider’s fees are excessive, you have no choice but to get them reduced and, if your provider refuses, you must terminate them in order to avoid violating your fiduciary duties.
Advisors have a golden opportunity to help sponsor clients understand what they’re getting and the reasonableness of the charges. While some plan sponsors may want to avoid change due to the change management associated with switching providers, the implications of staying with the wrong provider are far greater.