• Evaluating any notices received from the service provider about possible changes to their compensation and the other information they provided when hired (or when the contract or arrangement was renewed); 
• Reviewing the service providers’ performance; 
• Reading any reports they provide; 
• Checking actual fees charged; 
• Asking about policies and practices (such as trading, investment turnover, and proxy voting); and 
• Following up on participant complaints.
  

While the steps for monitoring service providers, and particularly recordkeepers, are commonly known by financial professionals who work with 401(k) plans, little has been said or written about how the duty to monitor applies when a plan’s recordkeeper is acquired by another recordkeeper. This article discusses how the duty could apply in that scenario. (Note that, while this article is based on the fiduciary duty to monitor, there isn’t a “one-size-fits-all” answer. The key is to take the steps needed to evaluate the impact of the change on the particular plan and to determine how the acquisition will impact the particular plan and its participants.)

While monitoring usually should be done at “appropriate” intervals, depending on the issue being monitored, fiduciaries also need to be aware of events that warrant a special duty to monitor. An acquisition of a service provider would ordinarily be one of those events. In turn, that raises the question: How should a plan monitor the combined recordkeeper?

In many ways, it would be similar to selecting a new recordkeeper, and plan fiduciaries may want to use the moment to re-evaluate the relationship in terms of costs and services.

In the easiest case, the plan’s financial professional will already have other similarly situated plans with the new recordkeeper that bought the old recordkeeper. (For our purposes, “similarly situated” means, at the least, plans with a similar amount of assets, a similar number of participants, and in an industry with a similar covered workforce). In that case, the professional can provide the plan fiduciaries with invaluable insights about how the acquisition will impact the operation of the plan. It may be that, for the needs of the particular employer and plan, the new recordkeeper has improved or additional services. In that case, assuming that the new recordkeeper’s pricing is comparable and reasonable, the change is for the better.

In other cases, the professional may not have relevant experience with the new recordkeeper, and the plan fiduciaries should, with the professional’s help, investigate the new recordkeeper’s services. In a sense, that could be done as an informal RFP (request for proposal) of only the new recordkeeper. While the issues may vary from plan to plan, here are some of the questions to ask and evaluate:

• What similarly situated plan clients of the new recordkeeper can you talk to? In effect, this is a request for references. It would be helpful to obtain 3-5 contacts at similar companies (in terms of assets, participants, and industry) to ask generally about their experiences (e.g., plan sponsor, committee, and participant services) and more specifically about the features of the old recordkeeper that are the most valuable to the plan (and perhaps about services where the old recordkeeper was deficient). It would be best to have a set of questions, so that each conversation covers the same issues and the answers could be compared and evaluated.
• What services does the new recordkeeper provide to support participants, including saving and investment services? Later this year, the new SECURE Act requirement to provide lifetime income illustrations will come into effect. What is the recordkeeper doing about that? What will the illustrations look like? What support/educational services will be provided to participants to help them understand the new illustrations on their statements? Will gap analysis be provided? What investment education and investment management services are provided to participants?

To the extent that the old recordkeeper provided valuable participant services, ask whether the new recordkeeper will continue to offer them.

• How will the new recordkeeper handle investments in the plan other than mutual funds and collective trusts, e.g., company stock, stable value, general account products, self-directed brokerage accounts? While the new recordkeeper will likely keep the old recordkeeper’s systems in place for a transition period, in due course the new recordkeeper will want to switch to its systems and policies. It’s important to know what those will be and to have an idea of when that is likely to happen.
  
• How does the new recordkeeper price plan services? While the plan’s current pricing for recordkeeping services may stay in place for a transition period, ultimately the new recordkeeper will move the plan to its methodology. Other questions include: How is revenue sharing treated? Do you offer an expense recapture account? How does that work (and does the money always belong to the plan even if we switch recordkeepers)? Can you “equalize” (or “levelize”) revenue sharing by allocating it back to the accounts of the participants who held the investments that generated the payments? How does that work and how often?

The transition to a new recordkeeper may also be a good time to benchmark the fees and expenses of the plan’s services if that has not been done recently. That may provide a starting point for negotiating fees (and give an insight into any future issues).

This is just a partial list of the RFP-like questions that can be asked. But it’s a start. The questions will vary from plan to plan, based on factors such as number of locations, education levels of the workforce, relative incomes of the covered workers, and unique circumstances of the employer.

But, what if the answers are unsatisfactory, or if the new recordkeeper is not forthcoming? That suggests that a more formal RFP process is needed. Unfortunately, that can be expensive and time consuming. If the plan sponsor is reluctant to engage in that process, a reasonable substitute would be for the plan’s financial professional to design a “mini-RFP” with only the critical questions and with inquiries about pricing. With an experienced 401(k) professional, that process would likely produce the information needed to make an informed and reasoned decision. And that is the definition of a prudent process.

 

Concluding Thoughts

The acquisition of a recordkeeper by a new recordkeeper doesn’t appear in the law as a monitoring event. But common sense says that plan fiduciaries should, at the least, obtain enough information to be able to determine that the participants won’t be adversely affected. In addition, plan fiduciaries, such as committee members, will want to know what support they will receive after the acquisition is completed and the transition period is done. Finally, the plan sponsor will want to know how its systems will integrate with the new recordkeeper’s. These questions are fairly obvious to experienced financial professionals. However, they may not be immediately obvious to the plan sponsor and fiduciaries. That’s where experienced professionals can provide valuable services to their plan clients.

The key is to engage in a prudent process to provide the needed information to the plan fiduciaries. Where the professional has experience with the new recordkeeper’s services to similarly situated plans, that may provide the information that is needed to make an informed decision. But, where that’s not the case, a more structured process may be needed. The least effort, but nonetheless meaningful, effort may be to engage in an informal RFP-like process with the new recordkeeper. But, if that doesn’t work, it may be necessary to use a process that includes competitive recordkeepers.