How to Evaluate a Retirement Plan Recordkeeper

Plan sponsors worried about their retirement plan recordkeeper may not be paranoid.

The U.S. Department of Labor maintains strict guidelines and regulations governing plans. Lawsuits under the Employee Retirement Income Security Act (ERISA) are an ongoing concern for retirement plan fiduciaries, including plan sponsors, advisors, and consultants.

These concerns over ERISA litigation risk make it important for plan sponsors to review the performance of the plan’s recordkeeper regularly.

A retirement plan recordkeeper is essentially its bookkeeper: a third-party vendor that tracks who is a plan participant, their investments, the flow of money and plan correspondence. The recordkeeper does not handle plan design, give investment advice or manage compliance.

Best practices in reviewing plan recordkeepers

Evaluating a recordkeeper — whether choosing a new one or evaluating a current recordkeeper — is not a straightforward, simple process. It involves a particular expertise and acumen.

Here are some best practices when looking at plan recordkeepers:

Enlist the help of a fiduciary plan advisor. A plan sponsor can’t just take a recordkeeper at its word that its fees are fair and reasonable. The needed due diligence to confirm this is best done with the help of an impartial expert.

A fiduciary plan advisor should be knowledgeable and unbiased, a trusted resource for you to work with throughout this process. The plan sponsor makes the final decision on which recordkeeper to hire, but an advisor can narrow the list of candidates through an objective assessment of each one.

Consider both quantifiable and intangible factors. Data should drive any search process for a recordkeeper. For example: How high are each candidate’s fees? How much experience do they have working with programs like the plan sponsor’s? How well have their plans performed?

But intangibles can come into play, such as how much confidence the plan sponsor has in the recordkeeper, the candidate’s enthusiasm for the work and if there’s a good cultural fit. Sometimes, intangibles can be what matters most if the quantifiable factors appear to be a wash.

Use the review to do a plan makeover

Switching recordkeepers used to involve fund-to-fund mapping — each participant was switched, fund by fund, from the old recordkeeper to funds in the new provider’s lineup with the closest matches.

But today, many sponsors can use the review as a chance to hit the reset button. For instance, participants’ investment diversification is often suboptimal. One effective alternative is to transfer funds into target-date funds, a managed account or both.*

That way, each participant’s investments are at least diversified and age-appropriate. Participants can always opt out of the default funds and choose their own asset allocation.

If nothing is broken, at least do a request for information

If a plan sponsor is happy with its recordkeeper but still wants to ensure that it isn’t overpaying for services, they can issue a request for information (RFI). This is simpler, more efficient and less time-consuming than a full request for proposal (RFP). An RFI is a quick reality check on market norms that can provide reassurance and possibly defense against litigation.

Weigh the potential savings with the costs of a recordkeeper switch

Always consider whether the potential savings justify the cost of a potential recordkeeper switch. If the savings are marginal, it might be better off to stick with the incumbent recordkeeper.

*An investment in a target date fund is not guaranteed at any time, including on or after the target date, the approximate date when an investor in the fund would retire and leave the workforce. Target date funds gradually shift their emphasis from more aggressive investments to more conservative ones based on the target date.

This content is for general information only and is not intended to provide investment, tax or legal advice or recommendations for any particular situation or type of retirement plan. Please consult with a financial, tax or legal advisor on your own particular circumstances before acting on anything referenced in this blog.

Securities offered through LPL Financial, member FINRA/SIPC. Investment advisory services offered through Global Retirement Partners, LLC (GRP), a registered investment advisor. Insurance services offered through HUB International. GRP, Washington Financial Group and HUB International are separate and unaffiliated with LPL Financial. Washington Financial Group is the approved name under which LPL Financial business is conducted.