Four Steps to Selecting a Retirement Plan Advisor

As a leading retirement plan advisor and consultant, we assist plan sponsors with dozens of advisor searches each year. We also lead many recordkeeper search and selection processes on behalf of our clients. Participating in and conducting the search and selection process gives us a firsthand view of what works well and—as importantly—what doesn't. Drawing on this experience, I'd like to share some best practices on choosing a retirement plan advisor. These insights apply, whether it is the first time you are engaging an advisor or you are looking to replace your current advisor.

1. Follow a Process

From a fiduciary perspective, plan sponsors are well advised to follow a documented process in selecting an advisor. Depending on your resources and budget, you may choose either to lead the process in-house, or to engage a consultant who specializes in conducting retirement plan advisor searches. If you have a procurement group in your organization, consider partnering with them. Procurement is unlikely to be well versed in retirement plan issues; typically, however, it is very effective at managing the process for determining vendor requirements as well as contracting with service providers.

More and more plan sponsors are issuing requests for a proposal (RFP), rather than simply requesting a proposal from an advisor. The purpose of an RFP is to garner important information regarding advisors' capabilities, experience, services and fees. Properly executed, the RFP brings focus to the topics that are important to your organization, provides consistency of information for fiduciary documentation purposes, and makes it easier to compare the responses from various advisory firms. As a starting place, The Retirement Advisor Council offers a template advisor search RFP that can be customized to your plan's unique needs. Your peer organizations, auditor or ERISA attorney may also have an RFP template that you can utilize.

It is important to form a committee to oversee the RFP process. This group might include your existing retirement plan investment committee (if you have one in place), a subset of that group, or a combination of key stakeholders from human resources, finance and other functions in the organization.

You need to construct a project plan with reasonable timeframes for key deliverables. It is rare for an organization, whether it is a company or a non-profit organization, to adhere to the timeline outlined in the RFP that is sent to advisors. Conflicting priorities and challenges in coordinating schedules cause many advisor search processes to extend beyond the originally communicated schedule, which is why a realistic timeline at the outset is crucial. A standard search process takes three to six months and may vary, based upon the size and complexity of the organization. The three major phases of the advisor search process are:

Phase 1: Goal setting and preparation (4-8 weeks)

Phase 2: Distribution and receipt of the RFP (6-8 weeks)

Phase 3: Decision making (4-8 weeks)

2. Determine Your Priorities

As a baseline, you probably want an advisor with no conflicts of interest to serve in a fiduciary capacity. What type of fiduciary capacity do you want the investment advisor to fulfill? You should decide before issuing the RFP. Most commonly, an advisor serves as an ERISA 3(21) investment fiduciary, and takes responsibility for making investment recommendations to the retirement plan committee. The plan sponsor, however, retains ultimate decision-making control and may or may not accept the advisor's recommendation. On the other hand, an ERISA 3(38) investment fiduciary has full discretionary authority to make actual investment decisions, including removing and replacing investments from the plan.

Prior to issuing an RFP, the RFP committee must make several key decisions, including:

Scope of services

  • How frequently do you want your advisor to meet with the plan committee to review investment and plan performance? The industry standard is quarterly, but some organizations choose to have their advisor conduct due diligence meetings on a less frequent basis.
  • Will you want to carry out a recordkeeper RFP process? To properly conduct a recordkeeper search and selection process, an advisor will devote significant time and resources on your organization's behalf—all of which comes at a price and should be included in the advisor's fee schedule.
  • What level of support do you need for participant communications, education and advice? At a minimum, most plan sponsors want their advisor to help develop their annual employee communication and education strategy in conjunction with the plan's recordkeeper. An advisor's baseline service package typically includes strategy development and review of participant success measures (participation, average deferral rates, etc. versus benchmarks). Some plan sponsors want the advisor to provide further services, like developing communications or conducting employee meetings, which likely entails additional fees.

The answers to these questions will help your prospective advisor understand your needs and price their services appropriately.

Selection criteria

  • Does it matter whether the advisor has experience with plans of similar type and size? For example, 403(b) plans usually prefer an advisor who has experience working with similar plans because of the plans' unique features.
  • Which of the committee's key issues do you primarily want your advisor to address? For example, employee engagement may be a key concern if the participation rate is low. Perhaps you want to ease your administrative burden, or are contemplating plan design changes to incorporate behavioral finance best practices. Top advisors should not only be extremely competent in selecting and monitoring investments, but also able to assist with all aspects of the plan, including recordkeeper/fee management, administration/compliance and employee communication & education.
  • What is your budget? Will the fees be paid by the plan or out of your operating budget? Price may not be as significant for a large plan with a healthy expense reimbursement account for paying advisor fees. But if the fees are a newly budgeted expense to the organization, with an explicit amount allocated for these services, you should convey so in the RFP. Prospective advisors will accordingly be able to craft a fee and service proposal aligned with your budget.

3. Include the Right Advisors in the Process

I recommend sending the RFP to a minimum of three and a maximum of ten advisors. Here are some of the best sources for compiling your list of RFP recipients:

  • Peer organizations are particularly important if experience with plans in the same industry is a key selection criterion.
  • Top recordkeepers have vast experience and knowledge in working with advisors and clients who utilize advisors. Out of a plethora of retirement plan advisors in the market, your recordkeeper's relationship manager can suggest firms you may want to include in your search process.
  • Your retirement plan counsel and/or auditor
  • Industry publications/resources are useful. PLANSPONSOR and its sister publication, PLANADVISER, publish lists of top retirement plan advisors and provide other resources for learning about the top advisors.
  • On-line research can aid you in your screening process. Retirement plan advisors all have websites containing important information and thought leadership.

4. Avoid Common Pitfalls

You can maximize time and effort in the advisor search process by avoiding certain missteps. Here are steps you can take to avert some of the most common pitfalls I see on a consistent basis from plan sponsors:

  • Make sure to provide appropriate background information to RFP respondents. To best customize their service offering and assign the appropriate resources, advisors must understand both the scope of services requested, and where you are in your fiduciary journey. This includes information that cannot be gleaned from a publicly available Form 5500 filing. For example, is there already a retirement plan committee in place? Has an investment policy statement been developed? Have there been any recent plan design changes or are you contemplating any changes? Do you have compliance issues?
  • Make the most of finalist presentations, ideally conducted with two or three advisory firms. This exercise allows your committee to "kick the tires" and hold an interactive discussion with a prospective service provider. If you have done the appropriate due diligence, it is very likely the chosen finalists all have the capability and experience to successfully service your plan. At this juncture, the meeting between the committee and the prospective advisor becomes a chemistry test. Can the committee see themselves working closely with the advisor's team? Does the advisor's personality and philosophy jibe with your organization? Do they understand what you want to accomplish? Do they have a plan to help you meet your goals and objectives?

Following best practices in selecting an advisor is not only prudent from a fiduciary perspective, but should help you choose an advisor with the right experience and expertise to meet your particular goals.

Note: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.

Investment products available through Cammack LaRhette Brokerage, Inc.
Investment advisory services available through Cammack LaRhette Advisors, LLC.
Both located at 100 William Street, Suite 215, Wellesley, MA 02481 | p 781-237-2291