Evaluating Plan Investment Providers

A Starter Checklist for Provider Due Diligence

The continued evolution of retirement plan regulations and media’s focus on retirement plan system has heightened plan sponsors’ concerns about their fiduciary responsibilities. According to a recent Pensions and Investments survey, due diligence, selecting and monitoring of plan investment lineup top retirement plan sponsor priorities list in 2014. In light of that, the do-it-yourself approach to investment monitoring is likely not the best choice for those who look for ways to better manage their fiduciary responsibilities. Two other models, ‘help me do it’ and ‘do it for me’ are increasing in popularity among plan sponsors and financial advisors alike.

In the “help-me-do-it” approach for investment selection and monitoring (ERISA section 3(21) fiduciary model), the plan sponsor selects an investment lineup and makes on-going decisions based on a list of options vetted by a financial professional who acts in the 3(21) fiduciary capacity. The 3(21) provider offers investment recommendation and monitoring; plan sponsor is charged with making the final decision.

In the “do-it-for-me” approach for investment selection and monitoring under ERISA section 3(38), it is the investment manager who assumes full discretion for selecting, monitoring, and (when necessary) replacing the investment options. This enables the plan sponsors to transfer the fiduciary responsibility for fund selection to the investment manager; plan sponsor is responsible for monitoring services of the 3(38) service provider.
For a financial advisor, 3(21) and 3(38) fiduciary service offering offers an opportunity to outsource those duties to a third-party and create leverage in providing important services to plan sponsors to help them run an effective retirement program while properly addressing fiduciary risks.

Yet, hiring a provider does not eliminate sponsor’s need for on-going due diligence. Whenever a third-party provider is engaged, it is critical to periodically evaluate their performance, continued fit, as well as compensation and its reasonableness.

We wanted to share checklist of issues a plan sponsor should consider when performing investment provider due diligence. While not exhaustive, its intent is to provide the foundation for a well-documented review process:

Experience and Background

  • How long has the provider evaluated and recommended investments for retirement plans?
  • How many plans does the provider serve in a similar capacity? How many plans are similar to yours?
  • How long has the current leadership been in place? What is the staffing/service delivery model?
  • What is the educational background, qualifications and experience of the management team and the team delivering plan services?
  • Are there any regulatory actions taken or pending against the provider or its employees (SEC, FINRA, and State Insurance Department)?
  • Review and retain the ADV Part II (RIA), ADV Part II 2b (IAR), the U4 filing, advisory agreement, other disclosure documents, the investment policy statement.

Investment Screening Methodology

  • What process is used to screen plan investments? Is it prudent and well-documented?
  • What factors are considered in this process and how are they weighted?
  • Are there circumstances when the provider would consider deviating from this process? What is their frequency? What are the expected deliverables?
  • Do these services meet the needs of the plan?
  • What does the provider require from the sponsor to successfully deliver services to the plan?


  • What compensation does the provider receive?
  • What is the pricing model: asset-based or flat fee (plan-level or per participant)? If asset-based, are there break points as asset values increase? If a flat fee, does it change with the growth of participant population?
  • How is the fee paid: directly by plan sponsor or record keeper (additional fee or through revenue sharing built into investment expense ratios)?

The market place continues to innovate and offer a broad array of services to plan sponsor and advisor communities. Reliance on those services does not absolve plan sponsors of their duty to monitor providers to make sure they continue to support plan participants’ best interests.

Retirement Plan Consultants at First Allied are ready to assist. If you have questions about fiduciary services options, provider monitoring, benchmarking of fees and services, please call us at (888) 926-0600 or via email to pensions@firstallied.com.