Many of the actions needed to operate an employee benefit plan (EBP) involve fiduciary decisions. This is true whether or not you hire someone to manage the plan for you or do some of all of the plan management yourself. Hiring a service organization to perform plan administration services is a fiduciary function and, as such, plan administrators are required to periodically monitor their service organization to ensure they are performing the agreed-upon services.
Various types of services organizations may be engaged by the plan administrator including trustees, custodians, investment managers, and record-keepers, all of which perform various functions on behalf of the plan. The trustee is responsible for the safekeeping of the plan’s investments, while the custodian is the party that actually holds the plan’s investment securities. Often the custodian also is the trustee. The custodian performs investment functions such as collecting and distributing income and purchasing and selling securities. The plan also may use an investment manager who makes investment decisions and directs the custodian in the purchase and sale of securities.
The record-keeper usually is a third party administrator (TPA) and is responsible for activities such as accounting for participant accounts, valuation of investments, preparation of participant statements and processing distribution checks. If the record-keeper is the TPA, it also is responsible for plan administration functions such as performing compliance testing, plan design, calculation, and allocation of employer contributions, filing the annual Form 5500, Annual Return/Report of Employee Benefit Plan, maintaining plan documents and tracking employee eligibility. The record-keeper is not responsible for the plan’s investments.
All of the service organizations described above require the plan administrator to monitor the service organizations actively involved in the EBP. An employer should establish and follow a formal review process at reasonable intervals to decide if it wants to continue using the current service organizations or look for replacements. When monitoring service organizations, actions to ensure they are performing the agreed-upon services include:
- Evaluating any notices received from the service organization about possible changes to their compensation and the other information they provided when hired (or when the contract or arrangement was renewed);
- Reviewing the service organizations’ performance;
- Reading any reports they provide;
- Checking actual fees charged;
- Asking about policies and practices (such as trading, investment turnover, and proxy voting); and
- Following up on participant complaints.
For more detailed information on this topic, the AICPA Employee Benefit Plan Audit Quality Center has prepared the Plan Advisory, Effective Monitoring of Outsourced Plan Recordkeeping and Reporting Functions, to assist plan administrators in understanding their responsibilities for monitoring their service organizations. It is a comprehensive document that contains information about your fiduciary responsibility for monitoring service organizations and useful tips for selecting and monitoring them and addresses the quality of plan accounting information, monitoring service organization controls over plan accounting information, and special considerations for different types of plans.