Competence is one of the three top attributes you should consider when shopping for a 401(k) provider. Unfortunately, it’s also a difficult attribute to evaluate due to the highly-technical nature of 401(k) services. I mean, can you evaluate and measure the quality of 401(k) nondiscrimination testing, government reporting, participant disclosures, or the accuracy of distribution processing? Probably not.
The Department of Labor (DOL) says “selecting competent service providers is one of the most important responsibilities of a plan sponsor,” but they only provide general guidance for meeting this responsibility. The extent of it is a Fact Sheet and a few paragraphs in their Meeting Your Fiduciary Responsibilities booklet.
More specific advice is needed. After all, the stakes are high – 401(k) fiduciaries can be subject to personal liability when incompetent 401(k) providers are hired. To assist you in picking competent 401(k) providers, I recommend a 2 step process:
The key to making this process simple is choosing objective criteria for your survey. I want to show you how to do that. Once this process is complete, you should file this analysis with other documentation that supports your 401(k) provider choice.
I recommend you use a spreadsheet for evaluating the competence of 401(k) providers. The goal for this spreadsheet should be identifying competence “red flags” such as lack of experience, insufficient mitigation of risk, or non-commitment to timely service. If a red flag is found, you should either eliminate the provider from further hiring consideration or justify the flag (e.g., company is new, but leadership has industry experience).
Below is a sample checklist. You can add or delete questions as you see fit to customize a checklist for your 401(k) plan.
| Employee Fiduciary, LLC | Provider #2 | Provider #3 | ||
|---|---|---|---|---|
| Experience |
Year Founded | 2004 | ||
| Approx. Plans | 3,000 | |||
| Approx. Participants | 70,000 | |||
| Approx. Assets | $2.5B | |||
| Risk Mitigation |
Does the provider have a current SOC 1 Report (Service Organization Controls Report)? | Yes | ||
| Does the provider have errors and omissions (E&O) insurance? | Yes | |||
| Does the provider have a fidelity bond? | Yes | |||
| Does the provider have an information security policy? | Yes | |||
| Is there any current or pending litigation or administrative actions against the provider? | No | |||
| Service Standards | E-mail or phone response time | Less than 24 hours | ||
| Contributions | Invested within 2 business days | |||
| Distributions | 7-10 business days | |||
| Quarterly Benefit Statements | 15 business days after quarter-end | |||
| Annual nondiscrimination testing | If employee census and employer survey are received in good order by 1/31, testing guaranteed by 3/15 |
Today, most 401(k) providers are on social media. Their profiles often include customer reviews. If a provider you’re considering is on social media, you should check out their customer reviews. You can also use Google to search for reviews.
Look for negative trends, not just bad reviews. After all, how often do you give a positive review for competent service? If you’re like most people, not often – competence is generally expected. Negative trends related to trading should be the most troubling. Fiduciary liability is most likely when 401(k) contributions are not invested timely or when participants can’t trade their account due to website outages.
You don’t have to be a 401(k) expert to evaluate the competence of 401(k) service providers – you just need to be able to identify issues. Comparing objective criteria for multiple providers can help make that job easy.
Competence is one of the three top attributes you should consider when shopping for a 401(k) provider - the other two are fees and breadth of services. Need more help shopping for 401(k) services? Use our shopping companion.