403(b) Retirement Plans: Why a Due Diligence Request for Proposal?

Updated on June 19, 2016
Jere Cowden

By Jere L. Cowden, Chairman and Mark C. Muto, Financial Advisor, Cowden Associates, Inc.

The Answer Is Simple:  Requests for Proposals (RFP), Done Right, Result In:


  • Reduced fiduciary risks
  • Lower plan costs
  • Improved service for plan participants
  • More efficient internal operations
  • Setting the stage for improved retirement readiness by plan participants

Executive Summary

The retirement landscape for hospitals has changed dramatically.  Among the factors

Mark C. Muto

driving change is the shift to defined contribution plans as the primary retirement offering and the rapidly changing regulatory environment impacting 403(b) plans, the retirement benefit vehicle of choice among hospitals.  Additionally, board members, senior management and others are being subjected to much closer fiduciary scrutiny. Their increasing awareness of their fiduciary duty is contributing to the increased retention of independent advisors.  A corresponding decrease in the use of agents and brokers is occurring as hospitals seek to eliminate the potential conflicts of interest they present.


Establishing appropriate processes is critical to protecting plan fiduciaries as well as maximizing the possibility that plan participants enjoy a dignified retirement.  Included among the critical processes is a well established and documented process for selecting vendors, investments and related services and documenting fees.  Conducting periodic due diligence RFPs is a critical part of fulfilling the fiduciary duty.


Brokers, Agents and Advisors

This article references brokers and agents and how they differ from advisors.  Let’s begin by defining how.  Brokers and agents are compensated by the financial services company they are representing based on products sold, whether it’s a hospital retirement plan; your IRA or your homeowners insurance.  They are not compensated for the guidance they provide, in fact, any guidance is considered incidental to the sale and is not advice.  Brokers and agents are not fiduciaries.  Often you will hear things like “well, if this were my money I might…” from your broker or agent.  Conversely, an advisor is compensated for the advice they provide, they do not sell products.  Their sole relationship is with the client and they are fiduciaries for the advice they provide.

Background on Hospital Retirement Plans

Hospitals historically offered employees defined benefit retirement plans with a supplemental defined contribution voluntary savings option covered under IRS Section 403(b).  Funding and accounting challenges related to defined benefit retirement plans have made it increasingly costly and more difficult to sponsor these plans and defined contribution plans have gradually become the primary or only retirement plan sponsored by many hospitals.  Proactive plan sponsors will take the viewpoint that this evolution is an opportunity to leverage the regulatory changes to create a plan with more predictable cash flows that is viewed as an enhanced benefit of employment and is an effective tool for retaining and recruiting employees.  Improved fiduciary protection is an added benefit to those in decision making roles.

Historically, 403(b) plans were individually sold annuities.  Now, many existing 403(b) plans have simply transitioned to similar group contracts.  Frequently these group contracts do not offer the more robust retirement plan features available in better 403(b) group plans.  Many of the contract provisions of these group plans are outdated and rife with fiduciary liability, including:

  • Excessive expense
  • Investment contracts with unreasonable restrictions to participants and plan sponsors
  • Investment offerings which are mostly or all funds offered by the provider (proprietary funds)
  • Absence of a solid process to select, monitor and remove funds offered to participants
  • Providers who are unwilling or unable to accept co-fiduciary responsibility
  • Participant “education/counseling” through an insurance agent or broker paid to sell products, a potential conflict of interest

Because hospitals have not historically retained independent advisors for their defined contribution plans, many are unaware of these potential liabilities.

Regulations Equal Disclosure and Transparency

The landscape for retirement plans, especially for hospitals has changed significantly.  Hospitals are now faced with new 403(b) compliance rules that will:  (1) Require them to complete a Form 5500 including the Schedule C fee disclosures (2) Beginning in 2012, IRS Code Section 408(b)(2) will be effective and plan sponsors will be required to disclose to participants on a quarterly basis plan-related and investment-related information including:

  • A description of the services provided
  • Whether the service provider will be an ERISA fiduciary
  • A description of the direct payments the service provider (and its affiliates and subcontractors) expect to receive from the plan
  • A description of the indirect payments the service provider (and its affiliates and subcontractors) expect to receive in connection with the arrangement, who will pay the indirect compensation, and for which services it will be received
  • A description of any compensation exchanged among related parties (such as within a bundled services arrangement) that is transaction-based or charged against a plan’s investment and reflected in its net value
  • A description of any compensation expected to be received in connection with termination of the service agreement
  • A description of how the service provider will receive its compensation

Please take a moment and ask yourself whether you know the answers to these questions and if you are prepared to provide this information to your employees?

Regulators from both the Department of Labor and the Securities and Exchange Commission are committed to increased joint investigations.  This alone should serve as notice to plan sponsors that they can be investigated, and the probability of being investigated is increasing.  For these reasons, according to a 2009 Healthcare Retirement Trends survey conducted by the American Hospital Association and Diversified Investment Advisors and covering nearly 200 healthcare plan sponsors, more hospitals are retaining advisors, most of those advisors are paid on a retainer basis and most plan sponsors meet with their advisor on a quarterly basis.

In addition to the new 403(b) and 408(b)(2) regulations, other significant regulations have increased compliance requirements for all plan sponsors.

Fiduciary Obligation

There is added risk for both the plan sponsor and individuals serving in fiduciary roles (people often do not realize they are fiduciaries).  Fiduciaries include anyone with discretionary control as well as those who influence plan operations.  Often members of senior management and the Board of Directors are fiduciaries.  Fiduciaries are required by ERISA to:

  • Act solely in the interest of plan participants and their beneficiaries and with the exclusive purpose of providing benefits to them
  • Carry out their duties prudently
  • Follow the plan documents (unless inconsistent with ERISA)
  • Diversify plan investments
  • Pay only reasonable plan expenses

As a fiduciary, if you do not carry out these responsibilities, you are considered to be in breach of your duty and subject to:

  • Personal liability including restoration to the plan of any losses resulting from the breach
  • Excise taxes
  • Civil penalties
  • Criminal sanctions
  • Removal and disqualification to serve as a fiduciary in the future

The new regulations, compounded with your fiduciary obligations, should make you question your current plan costs, services, internal operations and fiduciary processes.  In our opinion, the best way to assure that these concerns have been addressed is to work with an independent adviser to conduct an RFP.  A properly conducted RFP will provide you valuable fiduciary support and protection.  This is evidenced by the results of recent hospital vendor searches we’ve conducted.  These searches have resulted in:

  • Lower fees – thus ensuring the reasonableness of fees often paid by participants
  • Full fee disclosure by service, soon to be a mandate (often referred to as fee transparency)
  • Improved level of service for:
    • Plan participants (better web tools and availability of a professional educator)
    • Plan sponsors (reduce compliance and administrative burdens)
  • Increase in the number of funds available for the investment advisor to recommend and plan committee to consider.  Often any publically traded fund may be considered
  • Improved quality of funds offered based on an established measurement process
  • Reduced fiduciary risk by having  an independent advisor (a co-fiduciary) recommend and monitor funds
  • Improved retirement readiness through better education and plan design
  • Improved plan contract provisions, including exit provisions (more on this later).

Retirement Readiness

It is especially important for hospitals that desire to provide employees with a solid opportunity to enjoy a dignified retirement to do their utmost to offer employees education on both the need to contribute adequately and the fundamentals of investment decision making.  Providing employees with a personalized gauge of where they are today versus their personalized goals is often the best way to engage participants. Having independent educators who work on a salary basis is viewed by many, including regulators, as the best way to deliver participant education and, when available, advice.

Doing an RFP the Right Way

Vendors, TPAs and insurance companies all provide administrative service capabilities.  Determining the best service provider for you is done with an RFP.  The way in which your RFP is conducted determines the quality and usefulness of the responses you receive.  Most RFPs consist of a multitude of standard questions covering areas such as assets under management, total number of plans served, average size of plans served, average number of plans serviced by key account personnel and many others.  While important, these questions don’t reveal the intricate relationships between the many different players in the retirement plan services industry.  Other questions that will affect the outcome of an RFP are often excluded:

  • Independence – is the vendor totally independent and not aligned with a money manager or third party administrator?
  • Transparency – does the vendor disclose all fees and sources of revenue (critical to fulfilling your fiduciary duty)?
  • Expertise – does the vendor offer the expertise needed to perform the service they will perform?
  • Fiduciary Status – is the vendor willing to accept fiduciary responsibility in writing?
  • Industry Expertise – is the vendor experienced with goals and objectives of hospitals and do they possess an understanding of the unique advisory services required?
  • Communications – does the vendor offer effective written reporting and an ability to communicate with senior level executives?
  • Web Based Tools – are available web based tools appropriate for participants and the plan sponsor?
  • Contract Provisions – Do you understand the contract provisions and are they competitive?  Have they been reviewed by legal counsel and experienced retirement plan consultants to ensure the provisions are appropriate?  Sadly, onerous provisions are especially common in 403(b) contracts and often contain vaguely worded provisions.  If not considered prior to executing a contract, these provisions may be a very unpleasant discovery:
    • Front-end and rear-end sales loads
    • Deferred sales and surrender charges
    • Early termination penalties
    • Market value adjustments
    • Restrictions on participant withdrawals, even at retirement
    • Excessive annuity and risk charges

These charges can be significant and have convinced plan sponsors to delay needed plan improvements in a misguided attempt to avoid the cost.

The following chart highlights key results for some recent hospital due-diligence proposal we’ve conducted.

Expenses include plan administrative, recordkeeping, participant education, participant services, plan sponsor services and investment management fees (services typically associated with a fully bundled plan).


Plan sponsors are challenged with complexity from all aspects of hospital operation.  Removing the anxiety of ensuring that the defined contribution plan is properly aligned with business objectives and regulatory requirements frees time to focus on other responsibilities.  Engaging in an RFP process facilitated by a truly independent advisor allows plan sponsors and corporate executives to meet their fiduciary obligations, provides leverage to renegotiate services and fees; enhances service and investment opportunities and improves overall plan operation.

Note: The authors do not intend this article to be considered as legal or investment advice. Plan Sponsors and individual fiduciaries should consult appropriate legal and investment counsel before taking any action.

For more information, visit www.cowdenassociates.com. You can also check out Mark Varacchi Sentinel Management.



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