There has been much ado in the past year about ensuring reasonableness of fees, but how can plan sponsors ensure services are reasonable? It starts with documentation in a service provider agreement.

“Although ERISA and the DOL [Department of Labor] offer no specifics, the DOL could find an agreement to be a prohibited transaction,” Philip J. Koehler, CEO of ERISA Fiduciary Administrators LLC in Newport Beach, California, tells PLANSPONSOR. He notes, however, there are some helpful tips sheets on the DOL website that give plan sponsors bullet points for what to take into account when selecting and monitoring providers.

When crafting an agreement with a service provider, “first and foremost, plan sponsors need to have an inventory in their minds about what services they need instead of just having an open-ended conversation with a provider that may sell services not necessary for the plan,” Koehler says. Services need to be spelled out specifically in the agreement. Many providers have a standard form agreement, and some will not vary much from it, he notes. As fiduciaries, plan sponsors need to focus on whether there are options in the agreement for services they need for their plans.

It is helpful to inform providers of plan policies and constraints, Koehler suggests. Give the provider copies of the investment policy, fee policy and education policy. “If you don’t want a cookie-cutter agreement, you must give the provider specifics of the plan,” he says.

Basically, the agreement deals with all of the tangible services the provider is willing to offer, so it might spell out the processing of participant loans, but is there language in it that makes clear whether the provider will be performing any discretionary functions or has any discretionary control? According to Koehler, many agreements describe the loan origination process in detail, but will have in fine print that the plan sponsor is ultimately responsible for the decision of approving or denying plan loans. Processing is automated on most providers’ systems—and manually reviewing paperwork is more time consuming—so plan sponsors may find providers do not offer many options for such tasks, he notes.

“Most agreements are wallpapered with reminders that the service provider is not a fiduciary, and most have indemnification agreements that say the service provider will be held harmless if a participant or another party brings fiduciary action against the plan,” Koehler says. Plan sponsors need to think long and hard about whether these make sense to them; it is questionable whether this is reasonable, he warns. If plan sponsors are looking for someone to shoulder some of the fiduciary responsibilities with them, they need to be very clear about that, and the agreement should state that.

While it may not be spelled out in the agreement, plan sponsors should have a process in place for monitoring the service provider, as well as monitoring how participant complaints and processing mistakes are handled.

Another important thing, according to Koehler, is if the service provider is going to be handling assets in any type of way, there should be an appropriate fidelity bond in place. ERISA requires that any person/entity who exercises control over assets of a plan be bonded. If a fiduciary engages a service provider that is not appropriately bonded, the fiduciary violates ERISA.

The agreement should include provisions for terminating the agreement. Koehler says plan sponsors should make sure these provisions are commercially reasonable regarding termination fees if the plan sponsor takes its business elsewhere and regarding how much advanced written notice is required. Koehler explains that a six-month or longer notice and a charge of one year of fees is not reasonable.

Many plan sponsors lack the expertise needed to analyze service agreements, Koehler contends. It is wise for plan sponsors not to just sign it, but have an experienced lawyer or benefits consultant independent from the provider go through the document and look at items that will affect plan.

Koehler says it is “absolutely critical” those responsible for engaging the service provider are the signatories to the agreement. It could be the employer or a plan committee. If a committee or board, there may need to be a resolution passed before an agreement is signed.