12 . Mar . 14

RFP vs. Benchmarking

In light of recent regulations and increased scrutiny by regulatory bodies such as the Department of Labor, investment advisors have been forced to fully disclose their fees and, therefore, most are moving to straight-forward fee-based models and away from revenue sharing or commission models.

Now that fees are more transparent than ever, investment committee members and other fiduciaries have a responsibility to make sure these fees are reasonable given the services the advisor provides.

One very time efficient and cost effective way to do determine whether your company’s plan fees are at least in-line with the average is to conduct a fee benchmarking study.  There are a handful of companies that provide very thorough benchmark reports that will compare your plan’s fees to other companies’ similar in size and industry.  We are proponents of anything that saves time and money while still allowing fiduciaries to check off the due diligence requirements and, therefore, love benchmark reports.

That said, a benchmark report only shows you half the picture.  As mentioned above, the fiduciary’s responsibility is to determine the fees are reasonable in light of the services rendered.

So the benchmark report might show you how your plan’s fees stack up to the average, but it does not tell you how the services that come with those fees compare to others.  It is not your responsibility as a fiduciary to ensure you are paying the lowest fees – as long as those fees are justified.

The only way to see the whole picture is to conduct a Request for Proposal.  Through the request for proposal process, you have an opportunity to ask specifically what services each advisor provides for a typical client and what their fees are for those services.

Sample RFP Question:  Please provide a fee proposal for full service retainer for the next five years and include a list of all services that would be included in a full annual retainer.

The downside is that, even when using an electronic Request for Proposal tool to cut the time burden down significantly, the RFP process can be more time consuming than completing a benchmark study.  So, we recommend completing a benchmark study every year and conducting an RFP every three years.

If you haven’t done either for a number of years, think of them as complimentary rather than substitutes.  In other words, complete a benchmark report first to get a better grasp of your plan’s fees and how they compare, then use that information to guide your RFP process.

In both cases, you will almost always see some fee reductions while fulfilling your fiduciary responsibilities.

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