Action Plan for Monitoring Vendors

Many enterprises that sponsor retirement plans have learned the hard way that the U.S. Department of Labor is serious about enforcing ERISA’s principle for monitoring their plans’ vendors.

Admittedly, it seems unfair of ERISA to introduce such a vital compliance mandate without also publishing guidelines on how monitoring should be conducted.

Our years spent interpreting ERISA’s vague vendor monitoring principle to employers has led to the formulation of five proven compliance action steps.

Action plan for becoming a best-in-class vendor manager:

1
Read the vendor’s disclosures
Vendors MUST disclose in writing their fees and the services they deliver to an employee benefit plan’s fiduciaries. Read and understand them. If a disclosure is unclear or confusing, you are required to ask the vendor to make it understandable for you. Do not relent on this basic action step.

2
Verify that vendors adhere to their contracts
The most important goal of an ERISA fiduciary is to manage a process that includes close supervision of the performance of each vendor. That starts with ensuring that employees receive the services they pay for in their retirement plan.

3
Establish key performance indicators
Among best in class fiduciary organizations vendor performance is usually measured by a series of contractual Key Performance Indicators (“KPI”) that are relevant to the plan type sponsored by the employer. KPIs will vary by vendor category. For example, investment consultants might be evaluated based on the number of hours it requires them each calendar quarter to produce investment recommendations and an investment review report. Recordkeepers on the other hand, could be subject to KPIs that are based heavily on transaction processing metrics.

4
At least annually assess and confirm vendors’ compensation for reasonableness
A potent tailored program to ensure that vendors’ fees are appropriate leads to more than reduced costs. It can stimulate ideas for continuous improvement in operations and results for employees. This is an indispensable activity for lowering business risks. Vendors’ fees have a major impact on retirement plan outcomes. The U.S. Department of Labor enforces this step accordingly.

5
Factor the broad view into vendor management
Monitoring goes beyond the basic dimensions of quality, delivery and cost. Measuring the overall success of a vendor relationship takes into account its responsiveness and ability to communicate well at all levels.

For more best practice advice on effective vendor management, you can download a free copy of our industry impact study.