Evaluating Your Record Keeper

story_images_bar_graph_and_penThis is the third in a five part series on CAP fees assessing service performance and will focus on the record keeper (check out Part 1 and Part 2 if you haven’t already read them).

Evaluating record keepers’ performance is often intimidating for plan sponsors because doing so tends to be more subjective and qualitative rather than simply quantitative. Moreover, record keepers often provide numerous services which makes evaluation a complex task.

But monitoring and assessing a record keeper’s performance is very important and ought to be done formally on a regular basis to ensure that all services agreed to are being delivered in a satisfactory manner and that member costs are reasonable.

Below are they key areas plan sponsors should focus on and some suggestions for how to approach the evaluation of record keepers.

Record Keeper Role

Record keepers have a critical role in a CAP and they provide a variety of services and information to both sponsor and members. It is important to understand how the record keeper earns income from a plan and how they get paid. Record keeper fees are applicable to all investment options (excluding Guaranteed Investments (GIs) and Daily Interest type accounts)  and their fees are  paid by members regardless of whether or they use certain services (i.e., tools, information, helps lines etc.). Record keepers earn income from fees, direct charges and the interest spreads on GIs and Daily Interest Accounts (if applicable) and they also receive a portion of the fund manager fee paid by the plan members. If the record keeper is an insurance company they may also provide benefits services from which they earn revenue.

Evaluating record keeper performance should be at least a partially quantitative exercise that is focused on a variety of services and can utilize the statistics the record keepers collects ( i.e., web site usage, phone assistance, fund manager performance statistics, demographic reporting capability, the  types and number and strength of investment funds available, support personnel and account reps, tools and information for members). Direct feed back from members and the administrator and surveys can also be collected and used as qualitative information.

The value of Information and reporting flexibility provided by the record keeper about the demographics and member transactions should also be assessed since it is critical information in administering the plan in areas such as  risk and return performance statistics, and detailed demographic information.

Again, record keepers generally have a wealth of information about the plan and members that can be used to understand and assess performance. The administrator should also try to keep abreast of what other record keepers provide their sponsors and plan members. The key is to ask the right questions.

Sources of Revenue

If the record keeper provides the GIs then the competitiveness of the interest rate and premiums paid should also be part of the assessment. Plan sponsors should also consider the credit rating of a record keeper that provides GIs because it is a risk for plan members in the event of a default.

Another other issue that must be considered is for potential conflicts of interest if the record keeper also provides investment options used in the plan or as part of the asset allocation or target date funds. The fees and relative risk and return performance of the record keeper’s investments should be scrutinized to ensure they are reasonable and appropriate and that members are getting diverse choices with acceptable performance at a reasonable cost. Most sponsors only look at the investment options available in the plan and have little awareness of the funds that may be used within an investment.

Total Service Package

In looking at the record keeper fees and performance, plan sponsors should consider the total package of services and total dollars actually received from the fee package — namely, the fund manager, record keeper, and advisor, the GIs rates and premiums, communications and education, and the decision-making tools for members as well as any costs paid by the sponsor. In some cases the sponsor will use the record keeper as the plan governance advisor as well.

Once you have a breakdown of the record keeper services, and costs and corresponding actual amount paid by the members, you have a better base on which to better assess performance.

In assessing record keeper performance and costs you have to appreciate that there is a qualitative aspect to the assessment which may require you to develop unique cost measurement statistics or qualitative performance benchmarks. A checklist approach with a comprehensive list of services and details is a good start. From a governance perspective the key is that you are regularly monitoring the record keeper’s performance on behalf of the members who are paying most of the cost.

Because of the nature of the relationship with certain service providers it is advisable to have an experienced and impartial consultant assist in evaluating the performance of the record keeper.

In Part IV fees of these articles performance issues relating to advisors will be discussed.