Article
Supply Chain Management
Service providers to retirement plans are changing their stripes. That makes the job of selecting and monitoring them more challenging than ever.
Every business uses an interconnected “supply chain” to create its products or services and deliver them to customers. Supply chain management oversees materials, information, and finances as they move from supplier to manufacturer to wholesaler to retailer to consumer. Every well-established business spends ample time getting accustomed to its vendors and managing the supply chain.
Managing the employee benefit plan (“EBP”) supply chain is one of the most fundamental duties of plan fiduciaries. While many enterprises employ individuals with specific academic and experience backgrounds in supply chain management, EBP supply chains are not usually within the purview of such individuals. Instead, human resources executives typically carry that responsibility, rarely without the credentials held by supply chain professionals.
The difference between this EBP supply chain and a typical vendor supply chain is how executives evaluate and select these vendors. Ordinary vendors must satisfy several examination levels – not the least of which would be capability, pricing, quality, and integrity. But for the EBP supply chain, these typical evaluation rules do not, and cannot, apply in the same way.
The complicated nature of service offerings and pricing models and the disproportionate emphasis vendors place on their “brand” dilutes the ability to examine the traits that count. Namely, whether the vendor charges reasonable (and transparent) fees for their services, engages in conflicts of interest (and thus more pricing complexity) with other vendors in their supply chain, and defines fiduciary duty based on actual legal statutes or their invented terms. This complexity makes the plan committee or human resources team susceptible to potential fee gouging or unintentional neglect of its fiduciary duties.
Service Providers Have an Important Advantage Over Employers
In the preamble to its introduction of a change to ERISA section 408(b)(2), the so-called “reasonable fee” rule, the Department of Labor revealed a chilling finding that every person who serves as an EBP fiduciary should take into account. When addressing characteristics of the EBP supply chain, the DOL entered into the public record the following warning:
“Vendors are specialists in the design of their products, services, and compensation arrangements and are continually engaged in marketing to plan sponsors. Plan sponsors often lack this degree of specialization. Even very large, relatively sophisticated plan sponsors shop for services only periodically, generally once every three to five years. Smaller, less sophisticated plan sponsors face still higher information costs. As a result, vendors can maintain an information advantage over their plan sponsor clients. Vendors have a strong incentive to use their information advantage to distort market outcomes in their own favor. Current ERISA rules hold plan sponsors rather than vendors accountable for evaluating the cost and quality of plan services. And vendors can reap excess profit by concealing indirect compensation (and attendant conflicts of interest) from clients, thereby making their prices appear lower and their product quality higher.”
Fiduciary Lawsuits Focus on Service Provider Oversight
Anyone familiar with the legal risks of fiduciary service knows the dizzying pace of class action lawsuits against employers and their EBP committees over the last few years for failing to select and monitor vendors properly. The outcomes of those cases thus far are mixed. Recently the courts have dismissed some cases, while others are apparently indefensible and settle out of court for huge amounts.
The quality of the process used in a plan committee or human resources department’s vendor selection and oversight determines the results of challenges to their competence. Therefore, using an appropriate tracking framework and documenting the findings that form the basis for the fiduciaries’ decisions and actions is wise.
Managing a Fiduciary Supply Chain Requires More than Intuition
Given the complexity of pricing methods for recordkeeping, investments, and health plans, combined with the DOL’s comments, it should lead a responsible person to grasp that buyers of services for EBP plans need training and unbiased help procuring services and evaluating vendors ongoing.
Need help?
