It was great to see everyone who was able to attend our Employment Relations seminar in Columbus yesterday—”Strategies to Help You Build a Winning Team.” We thought we would share one of the questions that was asked: is it necessary to seek requests for proposal (“RFPs”) for a 401(k) plan on a certain schedule?
This question goes to the issue of fiduciary responsibility to be prudent in its selection and monitoring of investments, and to pay only reasonable expenses out of plan assets. ERISA Section 404(a)(1)(B) requires that a fiduciary must act “with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims.” This rule focuses on the process.
In a prior blog, we discussed the Kraft case and implications of that case. We have heard some such suggest that after this case, RFPs must be conducted every three years. However, this was merely an allegation of the plaintiffs and their expert, not a holding of the court. ERISA and the underlying regulations do not require that RFPs be done, much less that they be done on a particular time frame. Plaintiffs argued that prudent fiduciaries would have solicited competitive bids for recordkeeping services about once every three years, and that defendants’ failure to do so (during a 15-year period) resulted in the provider receiving excessive fees once its initial contract term expired. The appellate court did not presume that such a standard applied, but merely remanded the case to the district court for further consideration. Citing prior cases for the proposition that an independent appraisal is not a “magic wand,” and that seeking outside advice does not provide a “white wash,” the court explained that while the fact that defendants engaged consultants and relied on their advice with respect to the provider’s fee was certainly evidence of prudence, it was not sufficient to entitle defendants to judgment as a matter of law, and there were other issues regarding the advice that needed to be considered.
Accordingly, fiduciaries are encouraged to continuously consider: how can you demonstrate a prudent process regarding the selection and monitoring of investments, and payment of reasonable expenses? Like an appraisal or outside advice, an RFP is a tool in a fiduciary’s toolkit that can help demonstrate prudence, but it is not a magic wand or white wash. Further, engaging in an RFP could cost more than any savings that might be achieved, and there may be distinct advantages (such as reduced fees after implementation costs are recovered, and/or good service) with remaining with a current provider. Therefore, if trying to demonstrate prudent process in the selection of investments and payment of reasonable fees makes you uncomfortable, then it may be time for action, and an RFP might be one step in that action plan.