Many plan sponsors use the RFP (request for proposal) process to select plan providers and, particularly, recordkeepers.

Generally speaking, the RFP process is the most effective method for determining the proper pricing for the particular plan, as well as the services and features that are available from the provider.

However, in my opinion, almost all RFPs are fundamentally flawed.

That is because, based on the requests that I have seen, they focus on features rather than results. I believe that an RFP should, at the least, ask for the following information:

  1. Based on reasonable assumptions, what is the benefit adequacy ratio (including social security benefits) of the plans that you recordkeep?

    The RFP should also request information about the assumptions and methodology for determining benefit adequacy.
  2. What is the average participation rate of the plans that you recordkeep?

    Average participation rate should be defined as the percentage of eligible employees who are actually deferring into the plan.
  3. What is the average deferral rate of the participants who are deferring into plans that you recordkeep?

    Average deferral rate would be defined as the deferrals as a percentage of pay of the participating employees.

These questions focus on results and not on features. While features may be attractive, they are not meaningful unless they are effective.

Think about it. What matters more to the success of a plan than those three results . . . benefit adequacy, participation rates, and deferral rates? Is an attractive website more important? Is the speed with which phone calls are answered more important? What about the redundancy of the databases? All of those features and services are important. However, they are not primary . . . they are secondary to the primary purpose of a 401(k) or 403(b) plan, which is to provide adequate benefits at retirement.

Going forward, why not ask the important questions? If the providers cannot answer those questions, that suggests that they aren’t focused on those issues. Do you want to “partner” with someone who is not focused on benefit adequacy, high participation rates, and adequate deferral rates? (To be fair, many providers are just now developing these reports; however, your expectation in the future should be that they will be able to provide that information.)

It is time to re-visit our thinking about the best way to evaluate 401(k) and 403(b) providers. Employee-deferral plans are maturing. They are no longer the bright, shiny coin where excitement about features and services is enough. Instead, they should be measured on results.


Disclaimer Required by IRS Rules of Practice:

Any discussion of tax matters contained herein is not intended or written to be used, and cannot be used, for the purpose of avoiding any penalties that may be imposed under Federal tax laws.

Source: Report To Plan Sponsors