The most important activity of a defined contribution plan sponsor is the selection and monitoring of their retirement plan advisor. Yet plans spend the least amount of time on this activity compared to investments and record keepers. Why?
The RPA conducts due diligence on investments and record keepers, but obviously not for itself, just as it would not allow providers to conduct their own benchmarking or RFPs.
But the problem begins with a fundamental lack of understanding by the plan sponsor about the roles the various vendors play, which may be getting murkier as more record keepers offer wealth services to participants and may appear to be advisors because they offer advice.
At TPSU programs, we begin with a healthcare analogy to help plan sponsors understand:
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Plan Sponsor: The head of the family in charge of their family’s healthcare. Fred Reish puts it simpler: “They are like the mom putting the interest of the family ahead of her own.”
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Advisor: The doctor who assesses the healthcare needs of the family to determine what is needed, also puts the interest of the family first if they are co-fiduciaries.
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Record Keeper: The hospital or platform that delivers the needed care.
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TPAs: Local emergency care centers.
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Investments: pharmaceuticals
Plans immediately understand and then begin to better utilize their advisor or find one that can help. Like other vendors paid out of plan assets, the fees must be reasonable, which requires some form of due diligence – if paid directly, it only makes good business.
So what are the biggest mistakes plan fiduciaries make with their RPA?
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They don’t have an advisor or don’t know who they are. Over 90% of plan sponsors have an independent advisor not affiliated with their record keeper or asset manager for good reason.
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The RPA is not an investment co-fiduciary (3(21) or 3(38)). Co-fiduciary status must be clearly documented in the agreement, but even with a 3(16) added plus 3(38), the plan cannot outsource all fiduciary liability.
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The advisor is not a specialist. Many RPAs have built their business by “exposing” generalist advisors who do not have much if any ERISA experience. While true for plans with +$10 million or those growing quickly, smaller businesses may want to use a wealth advisor they know and trust and may not be able to attract the best and brightest RPAs.
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The RPA is a “Triple F” only—funds, fees, and fiduciary. While these services are important, they are just the basics. More plan sponsors are turning to RPAs for broader financial guidance, including participant advice or financial wellness.
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Not fully understand how an RPA is paid.
RPAs may be paid via: Plans should also know whether their home office receives additional compensation from investment or recordkeeping services, which may influence or limit the RPA’s recommendations. -
They don’t utilize their RPA properly. Advisors should be involved in all aspects of the plan, even if they don’t perform every duty directly, especially oversight and due diligence of other vendors.
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RPA due diligence has not been conducted in the last five-seven years. This is the one responsibility a current advisor should not handle themselves. With massive RPA consolidation, if an advisor sells their practice, an RFP is necessary to reassess their potentially new service and pricing model, just like with record keepers. Plus, advisor fees continue to decline according to the recently released 401(k) Averages book.
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Allowing RPAs to benchmark themselves. Benchmarking is backward-looking and can be manipulated based on selected time periods and data sets. It cannot and should not replace an RFP, even if it is a useful tool.
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They allow their current RPA to conduct their own RFP or RFI (Request for Proposal/Information).
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The RPA pushes proprietary products. Some firms have been fined for promoting high-cost proprietary investments while acting as fiduciaries. Additional red flags include RPAs who only work with a single record keeper, fail to schedule and document retirement committee meetings, or use complex acronyms and tax code references without explaining them in plain language.
The list could go on.
The one question plans should ask to determine if they need to take a hard look at their advisor is: “Should we be conducting an RFP for you?” The best advisors welcome and embrace this process – what can you say about the others?
