By Jeff Chang
Although many of our municipal and special district clients have sophisticated contracting and RFP departments, they often do not have balanced and well-negotiated administrative service agreements (ASAs) with their 401(a) and 457(b) recordkeepers. This is due in part to a lack of understanding of how ASAs differ from other local agency contracts and the fact that many such contracts are reviewed and “negotiated” when the contracting agency has little leverage.
At first blush, proposed ASAs appear to be presented on a “take it or leave it basis.” However, our experience has been that many, if not most, recordkeepers are willing to negotiate certain provisions of their service agreements – particularly if the prospective client is a larger plan in terms of total assets. Here is a brief list of contract issues or terms that should be considered:
- Most ASAs start off on the wrong foot by naming the public agency employer as the contracting party. This usually occurs because most standard plan documents provide that the employer will be the plan administrator, unless someone else is appointed. For a number of reasons, we think the designation of a “plan administrator” should be more specific and intentional. Assuming that you take steps to appoint a more suitable plan administrator, the contracting party should be the plan administrator, not the employer. At best, naming the employer tends to conflate the roles of employer and plan administrator. It can also undermine efforts to adopt a proper fiduciary structure and control potential fiduciary liability.
- Many ASAs give the recordkeeper the right to assign its plan servicing duties to another entity without the prior consent of the public agency. If you’ve gone to the trouble of vetting and hiring a specific vendor, you should not allow this.
- All draft ASAs that I’ve reviewed, relieve the recordkeeper from liability for “blindly” following the instructions or directives coming from the employer, regardless of whom they came from or what they say. At a minimum, the recordkeeper should be required to read and evaluate all such authorizations and requests to determine if they make sense, are properly authorized and can reasonably be implemented. Many ASAs also relieve the recordkeeper from responsibility for inaccurate or incomplete report or test results – once they have been transmitted to the client and the client, presumably, has had an opportunity to review them.
- Many ASAs permit the recordkeeper to change the terms of service or the fees being charged simply by giving notice. If you cannot eliminate this provision, you must consider what you will do, and how much time you will need in the future, if you are notified tomorrow of an unacceptable contract change or fee increase.
- Many “proposed” ASAs do not contain adequate dispute resolution provisions. Without an appropriate requirement to mediate or arbitrate contract disputes in a venue convenient to the public agency and using California law, the public agency may be forced to litigate claims against the recordkeeper somewhere on the East Coast under the laws of that state – an expensive and off-putting prospect.
This is not intended as a comprehensive list of what you need to watch out for or possibly negotiate in your defined contribution recordkeeping contract. It does provide public agencies with some idea of the types of provisions that are likely to creep into their recordkeeping agreements and the knowledge that they can do something about these provisions.
Jeff Chang is a partner at Best Best & Krieger LLP. He has four decades of experience skillfully evaluating benefit and retirement plan compliance to achieve maximum outcomes for public agency clients throughout California. He can be reached at firstname.lastname@example.org or (916) 329-3685.