When a plan sponsor hires one or more service organizations to handle plan administration functions, the agreement typically establishes that the service organization(s) assumes liability for its performance of those functions. The employer is required to periodically monitor the service organization to ensure it is handling the plan’s investments prudently. Prudence focuses on the process for making fiduciary decisions; therefore, it is wise to document decisions and the basis for those decisions, including an employer’s selection and monitoring processes.
The Department of Labor (DOL) provides the following tips as a starting point for plan sponsors hiring service organizations:
Information about the firm itself (e.g., financial condition and experience with retirement plans of similar size and complexity)
The quality of the firm’s services (e.g., the identity, experience and qualifications of professionals who will be handling the plan’s account; any recent litigation or enforcement action taken against the firm; and the firm’s experience or performance record)
A description of business practices (e.g., how plan assets will be invested if the firm will manage plan investments or how participant investment directions will be handled; the proposed fee structure; and whether the firm has fiduciary liability insurance)
Document the hiring process
Ensure the service organization is clear about the extent of its fiduciary responsibilities
Obtain a fidelity bond for individuals handling plan funds or other plan property
Monitor the plan’s service organizations
Other important points to consider when hiring a service organization are the ability to access data maintained by the service organization on both a daily and annual basis, and whether the service organization agrees to obtain a Service Organization Controls (SOC 1) report. And finally, you should ensure that a service organization hired to prepare the plan’s financial statements will provide you with the support you need to understand those financial statements.
FMD can help with your Employee Benefit Plan Audit.