United States: Vendor Fees: The Importance Of RFPs

The reasonableness of vendor fees has always been an important consideration for fiduciaries of 401(k) plans. The focus on vendor fees, especially those of investment advisors and recordkeepers, increased dramatically with the Department of Labor's issuance of the 2012 fee disclosure rules. These rules allowed fiduciaries, for the first time, to understand and be cognizant of all aspects of investment and recordkeeper fees – both those paid directly by the plan and those paid indirectly through revenue sharing and other soft dollar arrangements. In addition, with the transparency of fees came a wave of competition among investment advisors and recordkeepers that has dramatically reduced fees for these services.

Fiduciary Fee Litigation. While market conditions have been changing rapidly, the number of participant lawsuits claiming that 401(k) and 403(b) plan fiduciaries breached their duties by allowing plans and participants to pay excessive fees has exploded. Many of these lawsuits have been successful in achieving multi-million-dollar settlements or judgments against fiduciaries. These lawsuits started with the largest 401(k) and 403(b) plans, but they have moved steadily downstream and now attack fiduciaries of plans with less than $100 million in assets. Successful claims have included, for example, that plan fiduciaries: (i) did not know or analyze the amount of fees being paid; (ii) allowed plans to pay fees based on a percentage of assets, so fees increased unreasonably as assets (but not services) grew; (iii) did not insist on a per-participant fee structure that reflects the value of the services provided; and (iv) did not perform regular investment advisor and recordkeeper searches, which resulted in higher-than-market fees as competition pushed fees lower.

Review of Recordkeeper Fees. For all of these reasons, fiduciaries need to ensure the 401(k) and 403(b) plan investment advisor and recordkeeper fees that plans are paying are reasonable for the services provided. As a general rule, we recommend that plan fiduciaries perform (i) an annual fee benchmarking based on published sources; (ii) a request for information ("RFI") every two to three years based on a high-level, no-name inquiry of several investment advisors and recordkeepers; and (iii) a full-blown investment advisor and recordkeeper search through a request for proposal ("RFP") every four to six years, during which detailed bids are requested with the vendor's business on the line.

Advantages Overcome Initial Concerns. When faced with performing an investment advisor and recordkeeper search, many fiduciaries are reluctant to proceed. They often express their happiness with the current investment advisor or recordkeeper, the reduced fees that an investment advisor or recordkeeper may have just provided based on an RFI, the disruption to participants that a change in the investment advisor or recordkeeper may cause, and the lack of internal resources to perform an investment advisor or recordkeeper change if that is the outcome of an RFP. Notwithstanding these initial concerns, through the many investment advisor and recordkeeper searches we have performed, we have found that:

  • Better Fit and Fees.As the services and fees of other investment advisors or recordkeepers are explored, many fiduciaries become aware that their current investment advisor or recordkeeper may not provide the best services or fees for their plans or participants, and that there is a better fit for a lower price. In other situations, a fiduciary may decide to keep the plan's current investment advisor or recordkeeper based on enhanced services and lower fees promised as part of the RFP.
  • Lower Fees. While fee reductions resulting from RFIs are advantageous, they usually pale in comparison to the fee reductions that can be obtained through an RFP. For example, an RFI a client sent a few years ago resulted in recordkeeping fees for the plan decreasing from $90 per participant per year to $84 per participant per year. When we performed a recordkeeper search two years later, the recordkeeping fee for the same recordkeeper dropped to $50 per participant per year. In another instance, an RFI resulted in a decrease in recordkeeping fees from $85 to $74 per participant per year. One year later, an RFP resulted in a fee proposal of $63 per participant per year from the same recordkeeper, and $49 per participant per year from a competing recordkeeper that the fiduciaries determined provided a higher level of services.
  • Energize Participants. The concern of plan fiduciaries that an investment advisor or recordkeeper change will be disruptive for participants generally results from the fear of the unknown and is often overblown. We have found that, if the change introduces enhanced services and lower fees and is communicated effectively, participants are more likely to be energized with increased interest in the plan and their retirement savings.
  • Short-Term Increase in Work for Long-Term Advantage. A change in recordkeeper does create more work for the benefits and payroll personnel during the conversion process, and a change in the investment advisor may create more work for other plan vendors. However, recordkeepers can minimize the burden on internal personnel and shoulder the largest portion of the conversion work, setting up the new recordkeeping system and obtaining all data and information from the outgoing recordkeeper. For instance, in one of the searches we performed, a recordkeeper offered as part of its RFP response to place a "conversion concierge" at the plan sponsor's location to assist the benefits and payroll personnel. In addition, the cost of temporary personnel to assist with the conversion may be charged to the plan, still resulting in an overall fee reduction for participants. Finally, once the conversion is completed, the new recordkeeping system may result in reduced ongoing work for benefits personnel.

Summary. Investment advisor and recordkeeper searches are a very important aspect of the fiduciary duty of "procedural prudence" — i.e., setting up and carrying out prudent processes that are intended to render beneficial results for participants. They provide 401(k) and 403(b) plan fiduciaries the opportunity to ensure not only that fees are reasonable, but also that the appropriate services, technology and education are being provided to the plan participants.

Investment advisor and recordkeeper RFPs can result in significant cost savings for plans and participants, and they often result in a higher level of services even if the investment advisor or recordkeeper does not change. In addition, by carrying out these processes and ensuring that fees and services are optimized for participants, fiduciaries achieve an increased level of protection. In today's world of aggressive plaintiffs' attorneys mining for litigation against fiduciaries, this protection cannot be overstated, especially when the RFP process also can yield so many other benefits.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions