In an attempt to stem the tide of ERISA violations, many CPAs’ annual plan audits now require proof that their clients’ formally examine their vendors’ arrangements, according to Daniel Williams, who is Senior Manager of Audit Services at LaPorte CPAs.
“Much consideration should be given to the qualifications, credentials, and experience of service providers, with fees playing a secondary role in the decision process.”
(1) Know what the U.S. Department of Labor Requires
The DOL insists that plan sponsors are not to get stuck on price. Instead, plan officials are required by ERISA to focus on quality of service. A vendor can at the same time have the lowest price and the lowest quality of work. Your goal is to understand what each vendor’s value is relative to its compensation. Your ERISA qualified plan management system should follow and document a formal method that you use to evaluate, select, and then reevaluate your plan’s vendors. Get unbiased expert help if your plan lacks such a method.
(2) Install Performance Indicators for Each Vendor
The best time to set the key points against which a vendor will be evaluated in order to maintain its role with an ERISA qualified plan is when a vendor is hired. There is, of course, no wrong time to install vendor performance measurements. In order to ensure that your plan’s vendors do not drag your plan into “excessive fee” territory, which is happening with widespread frequency, use performance criteria that can be tracked and evaluated on a regular basis such as monthly, quarterly, or annually. For our clients, Roland|Criss examines a few key metrics to evaluate how well vendors balance the quality of the services they deliver with the level of compensation they receive. The metrics vary based on vendor categories. For example, recordkeepers are evaluated differently from investment advisors.
(3) Add a Vendor Assessment to Your Plan’s Annual Compliance Program
The law requires that plan sponsors prove that they evaluate their vendors’ fee disclosures for adequacy and then document the method they use to determine if their vendors’ compensation is reasonable. Merely comparing your vendors’ fees to their competitors (so-called “benchmarking”) alone won’t comply with the law. Determining if a vendor’s compensation is reasonable can be a complex task. A ready solution exists that is easy to implement and carries the weight of a legally defensible independent opinion. Read about it here.
*U.S. Department of Labor: ERISA Enforcement; National Enforcement Projects; Plan Investment Conflicts dol.gov/ebsa/erisa_enforcement.html
