Why Most Retirement Plan Advisor or Recordkeeper Searches Are Not Subject to the RFP Requirements of the Sponsoring City or District

By Jeff Chang

Many cities and their retirement plan investment advisors believe that the city must periodically issue an RFP for defined contribution plan recordkeeping or investment advisory services in accordance with the city’s RFP policy or ordinance. Having reviewed the results of numerous such RFPs, we think that most cities and special districts can do a much better job of finding and evaluating their 401(a) and 457(b) service providers by going outside of the entity’s normal RFP process. In most cases, a city or district’s general contracting department cannot properly evaluate or negotiate recordkeeping or investment advisory services – they simply don’t know enough about how the plan(s) work, what these providers do and the various ways the providers are compensated.

Most plan documents allow the “employer” to designate a plan administrator. If this is done – and it should be done in almost all cases – the plan administrator under the plan usually has full authority to hire and fire all outside providers to the plan. Previously, we discussed why a city should designate a specific “plan administrator.” If your city or district has acted to appoint a designated plan administrator (e.g., the human resources director or the finance director), the designated plan administrator, not the city or district, should be conducting the provider search and should be the contracting party. If the city or district is not the contracting party, its RFP policy or ordinance should not come into play. If your city or district is still the contracting party, you should get advice about this because this could create confusion about who the plan fiduciaries are and who may be liable for any fiduciary breaches.

Practically all plan documents provide that the fees and expenses associated with such outside providers (i.e., advisors and recordkeepers) may be paid from plan assets as long as they are reasonable. The typical arrangement for most cities and special districts is for the 401(a) or 457(b) plan to pay for the recordkeeper and for the plan’s investment adviser out of the plan’s asset. Again, if the city or district is not paying for the recordkeeper or the adviser, its RFP process is not applicable.

A plan fiduciary is subject to special duties and rules under California law. Although plan fiduciaries must make sure that the expenses or fees paid by the plan are “reasonable,” selection of an appropriate recordkeeper or investment adviser does not require the selection or retention of the lowest bidder – another reason that a typical RFP process may not be the best. We believe, for example, that selecting the right investment adviser for you agency’s 401(a) or 457(b) plan likely should involve more subjective considerations.

In keeping with our advice on who should, or shouldn’t, serve as a plan fiduciary or administrator, the person charged with administration of a plan needs to be familiar with the day-to-day operations of the plan, its complex terms and the various tax and non-tax rules that may apply. This is not a situation where a retirement plan can be properly managed or maintained by a “village” – there needs to be specific responsibility and accountability. So, if the village is not the appropriate entity to be working with or overseeing plan consultants and advisers, it logically should not be selecting them either.

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 jeff.chang@bbklaw.com or (916) 329-3685.

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