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Monday, October 19, 2009

Benchmarking as a Part of a Prudent Process

Reish & Reicher Adviser Report
By Fred Reish
It is commonly accepted that 401(k) fiduciaries must prudently select and monitor both investments and service providers. It is also understood that, in order to fulfill their selection and monitoring responsibilities, 401(k) fiduciaries must engage in a prudent process. However, … many plan fiduciaries and advisers do not understand the specific requirements for a prudent process. This article focuses on those requirements.
Basically stated, there are several steps to a prudent process, which are:
  1. Identify the particular issue to be considered. …
  2. Determine the information that is relevant to making an informed decision about that issue. …
  3. Gather and evaluate the information. …
  4. Implement the decision.
  5. At reasonable intervals thereafter, monitor the decision.
When evaluating the relevant data, the fiduciaries should compare it to comparable information from the marketplace. In other words, fiduciaries have to “benchmark” the investments and services in order to evaluate their quality, cost, effectiveness and other attributes. This requirement applies to all fiduciary decisions, regardless of whether they are about recordkeepers, investments, investment advice, participation, and so on. In other words, benchmarking is an inherent part of a prudent process—and fiduciaries must engage in a prudent process for every decision they make.
Here is what the DOL says about the process for selecting a service provider (which applies to all fiduciary decisions): “...the responsible plan fiduciary must engage in an objective process designed to elicit information necessary to assess the qualification of the service provider, the quality of the work product, and the reasonableness of fees charged in light of the services provided.”
The DOL goes on to say: “What constitutes an appropriate method of selecting a service provider, however, will depend on the particular facts and circumstances. Soliciting bids among service providers at the outset is a means by which the fiduciary can obtain the necessary information relevant to the decision-making process.”
In this case, the DOL is saying that, by soliciting bids, the fiduciary can obtain information about the individual provider... and can also obtain comparative, or benchmarking, information about other providers of these services.
The DOL continues: “Whether such a process is appropriate in subsequent years may depend, among other things, upon...the fiduciary’s knowledge of prevailing rates for the services...Regardless of the method used, however, the fiduciary must be able to demonstrate compliance with ERISA’s fiduciary standards.”
In other words, regardless of how the fiduciary obtains the comparative information, the fiduciary must be able to demonstrate that he engaged in a process to evaluate both micro information (related to a single service provider) and macro information (comparative data from the industry).
The point of this article is that, in order to engage in a prudent process, fiduciaries must do more than analyze a particular service provider or a particular investment. Instead, they must also compare that information to comparable data about other similar plans, services or investments. …

Any U.S. federal income tax advice contained in this communication (including any attachments) is neither intended nor written to be used, and cannot be used, to avoid penalties under the Internal Revenue Code or to promote, market or recommend to anyone a transaction or matter addressed herein.

© 2009 Reish & Reicher, A Professional Corporation. All rights reserved. The ADVISER REPORT is published as a general informational source. Articles are general in nature and are not intended to constitute legal advice in any particular matter. Transmission of this report does not create an attorney-client relationship. Reish & Reicher does not warrant and is not responsible for errors or omissions in the content of this report.
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