Proper Advisor Benchmarking: Why Facts Beat Opinions for ERISA Compliance

As 408(b)(2) plan level disclosures and the 404(a)(5) participant disclosures become effective, plan sponsors should have a strategy in place to address the threat of litigation. Plaintiff attorneys may find discontented participants a target-rich environment to leverage the Supreme Court’s decision authorizing lawsuits by individual 401(k) plan participants based on “impaired value” of plan accounts.

Surveys Are No Longer the “Circumstances Then Prevailing”

Benchmarking has historically been the purview of surveys that are either influenced by respondent’s opinions or responses from participating firms to a closed study. Respondent opinions are subjective and in many cases influenced by lack of time, loyalty, and rewards. It’s not unusual for the survey request to be delegated to someone with less knowledge or interest in the subject matter. As a result, survey responses are highly suspect.

Alternatively, closed studies are hampered by the inherent conflict associated with the survey objective. For example, a fee survey exclusively populated with data from a restricted list of competitors provides no incentive to report anything other than the highest fees to create a benchmark that can easily be beat in a competitive light of ERISA fiduciary standards.

The Need for Domain-Specific Expertise

Benchmarking is a low-cost, quick, and easy alternative approach to an RFP for assessing reasonableness of fees for services rendered by the incumbent or prospective advisor. Benchmarking can be easily provided on a yearly basis to assist with the monitoring of reasonableness and assist with fee negotiations among the limited number of advisors participating in the RFP process.

Unfortunately, most advisors are retained based on relationships and have no domain-specific expertise. Plan sponsors that have hired an advisor without a documented process to support its reasons are vulnerable to claims of fiduciary breach of loyalty and prudence as well as potential claims of self-dealing and conflicts of interest.

Key Takeaways for Plan Sponsors

1. Document the process used to select and retain advisors
2. Use objective, fact-based benchmarking rather than opinion-based surveys
3. Evaluate advisor qualifications using established standards relied upon by the legal community
4. Assess domain-specific expertise according to academic research that has verified reliable indicators of expertise
5. Consider the new regulations under ERISA 408(b)(2) and 404(a)(5) when evaluating advisor relationships