How To Evaluate Covered Service Providers Under ERISA

By Bob Herdoiza

As a retirement plan fiduciary, you have a legal obligation to prudently manage the plan in the sole best interest of plan participants and beneficiaries. Part of this very likely will include delegating responsibilities to specialists, or covered service providers (CSPs).

What is a Covered Service Provider?[1]

A covered service provider (CSP) is defined as any service provider that enters into a contract or arrangement, written or otherwise, with an ERISA covered plan and reasonably expects to receive $1,000 or more in compensation in connection with the services. CSPs include:

  • Any registered investment advisor providing services to a plan or its participants
  • Any ERISA plan fiduciary
  • Any fiduciary to an investment vehicle considered a “look-through” for plan asset purposes (such as a common trust)
  • Any recordkeeper or brokerage firm that provides a platform on which investments can be directed by participants in a plan with individual accounts
  • Other service providers who expect to receive indirect compensation, or compensation from sources besides the plan sponsor or plan, such as through revenue sharing, commissions, soft dollars, or finder’s fees. These providers can include accounting, actuarial, legal, professional services, consulting, banking, insurance, securities, investment brokerage, recordkeeping, third party administration, and other service providers.

Covered Service Provider Disclosures[2]

Under ERISA, CSPs are legally mandated to provide certain disclosures on or before the date that they begin providing the service. These disclosures are:

  • A description of the services provided to the plan
  • The CSP’s status as a fiduciary to the plan
  • An estimate of compensation, either direct or indirect, received or paid to other CSPs
  • If providing recordkeeping services, an estimate of the related cost
  • Explanation of how compensation is received, such as deduction from plan assets or billing
  • If designated investments are provided, an estimate of related fees and expenses

Evaluating a Covered Service Provider

When looking for CSPs, you first need to know what services you actually need. Review every area of the plan and consider your needs; are they legal, accounting, trustee/custodial, investment management, recordkeeping, investment education, or advice? ERISA expects that you have the expertise to carry out your required fiduciary duties. If you or your team do not possess that expertise, you are required to go get that expertise.

Once you know what services you are looking for, you can then identify CSPs that provide those services. As you find providers of the services you need, ensure to run them through a due diligence process to get a feel for the breadth and quality of their service offerings. Assessing the satisfaction by calling customer references is a good place to start. 

After narrowing down your options, give them each identical and complete information regarding the needs of your plan. You will not be able to compare their offerings if they are each working with different information and have a different understanding of your needs. Though CSPs are not required to provide disclosures to you at this point, now is a good time to request the above disclosures. Having the same disclosures on hand from every potential service provider greatly aids in the selection and review process. Also, if you have trouble getting disclosures from a service provider during the selection process, it may reveal what working with that provider on a regular basis would be like. 

A couple of other items to consider: 1) having the disclosures will also enable you to detect potential conflicts of interest that could affect the services or advice provided to your plan, 2) you need to make sure that any CSP that will handle plan assets has a fidelity bond and 3) all CSPs that require licensing are up-to-date with the authorities with no complaints against them.

Reviewing Your Covered Service Provider

From time to time, you are required to review the performance of your chosen CSPs. Here is guidance to assist you in this process:

  • We recommend that you review CSP performance annually
  • Make sure that the services they are providing and the fees they are charging are in alignment with what they presented to you during the sales process and what's written in their agreement. You want to make sure you are actually receiving commensurate value with the fees they are charging
  • Benchmark their fees to other providers taking care to line up the service offering
  • Consider conducting an RFP process every three to five years for plan providers and third party administrators and five to seven for advisors
  • Check to see if there have been any significant changes in the information that you used to make your initial decision when doing your evaluation
  • If appropriate, obtain feedback from plan participants regarding their experiences with the CSP
  • Do whatever is reasonable to provide a fair assessment of the CSP

With both the initial selection process and the subsequent reviews, thoroughly document your process and what you learn. It is much easier to demonstrate compliance with required CSP reviews having full documentation of your activities. 

How We Can Help

Both evaluating and reviewing CSPs can be a time-consuming process, especially if you are not well-versed in all of the laws and specifics of retirement plans. At Stonebridge Financial Group, we walk alongside you guiding and doing as needed to keep you out of trouble. If you would like more information about how we can help, send me an email at [email protected] or call my office at (855) 530-0500 x601.

About Bob

Bob Herdoiza started his career as a CPA auditing retirement plans and is currently a Partner at Stonebridge Financial Group, a registered investment advisory firm. Stonebridge seeks to help clients build and manage highly effective, successful retirement plans. Bob also served as President of CEBOS for more than 15 years where he managed his company’s retirement plan before joining Stonebridge Financial Group. He takes pride in his firm’s 98% client satisfaction rate (according to a 2016 client survey) and individualized implementation approach. Learn more by connecting with Bob on LinkedIn or visiting www.stonebridgefinancialgroup.com.

[1] https://www.frostbrowntodd.com/resources-covered-service-provider-disclosure.html

[2] https://www.dol.gov/sites/default/files/ebsa/about-ebsa/our-activities/resource-center/fact-sheets/final-regulation-service-provider-disclosures-under-408b2.pdf