Employers Discuss Why They Use Vendor Search Consultants

Employers use the help of a consultant searching for employee benefit vendors, narrowly for certain tasks or pricing only and not at all.  

Search consultants can provide employers additional insights that help to extract the most from requests for information and requests for proposals, but there are several things to consider before deciding to use an intermediary.

Some employers secure the support of a consultant to design, sort and score requests for proposals and requests for information, while others use consultants more narrowly for pricing or because they offer access to proprietary systems for evaluating benefit providers.

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“In the instance of the recordkeeper RFP or RFI, we would lean on the [retirement] plan adviser as a second set of eyes to help us to make sure that we’re covering everything that we want to cover,” says Cory Fitts, senior director of benefits at Hines about their hiring processes. “Less so in the case of a [retirement] plan adviser. “Typically we manage that on our own, but we’ve sourced documents from other employers, from professional organizations that can provide guidance in tailoring [the search] to meet our needs.”

Plan sponsors complete vendor searches—RFI and RFPs for retirement benefits and health care providers to meet their fiduciary responsibilities under the Employee Retirement Income Security Act, keeping the retirement plan out of legal or regulatory hot water and to enhance the plan for participants, employers explained. 

Consultant, Help!

Plan sponsors have several reasons for choosing to work with consultants to extract the most from their vendor searches.

At Hines, a global real estate, investment, development and management firm based in Houston, working with a consultant to complete vendor searches will depend on the situation, explains Fitts.

“We have used consultants in the past, having been through the [RFP] process a few times,” she says. “It’s not necessarily something we need to do on a regular basis but [more] due diligence just to make sure that we’re asking everything we need to on a on [regular] basis.”  

Fitts also notes the cost can be prohibitive: “leveraging a consultant [fee] that’s a consideration as well, because that’s the participants’ money going to fund that consultant fee,” she says.

She asks whether paying the consultant fees is being a “good steward” or if the employer could do as well without one.

For employer fiduciary protection, “the question of whether a plan fiduciary should get consulting help in preparing RFPs and making decisions is highly dependent on the nature of the situation,” says Drew Oringer, a partner and general counsel at the Wagner Law Group.

The first question is whether the fiduciary thinks help is necessary, he adds.  

The complexity of the decision and the costs of the consultant are highly relevant factors for selecting consultant support, or not, he explains.

“I would like to think that fiduciaries should not need to incur the costs and effort involved with getting a consultant where the fiduciary really does not need outside assistance, but the litigious nature of our society could result in arguably unnecessary preventative measures being taken in some cases,” Oringer says.

American Fidelity Assurance Co. worked with a consultant to evaluate retirement plan service providers—eventually changing the recordkeeper and investment administrator—in a 2020 benefits search, says Thayla Bohn, senior vice president of corporate and human resources at the Oklahoma City, company.

The life and health insurance products provider worked with a consultant on the initial vendor search RFI and the ultimate RFP. The former was helpful for narrowing the criteria to satisfy the RFPs requirement of the plan and for sorting and scoring the RFPs, she says.

“Initially, [the consultant] provided us with some forms, things for feedback,” explains Bohn. “Once we had completed the RFP, we identified what [our plan] requirements were and then utilized the requirements to then assess whether the providers were going to be able to meet them.”

The consultant also helped American Fidelity score the proposal, she adds. 

“There was some scoring that we did—on a scale of one to five—and they did help us with that,” Bohn explains. “Having gone through RFPs in the past with multiple clients, they had a lot of expertise and were able to help us assess whether the providers would meet our needs or not.”  

Consultant, (help us) Limited

The Southwest Airlines Pilots Association works with a consultant, but on a much more limited basis.

The Dallas-based plan sponsor evaluates vendors on three levels: RFPs that are deep into the weeds, investigating the RFI and for gathering information for investment and then “something a little less serious that we call benchmarking,” says Mike Haynes, director of retirement, at the association.

“We lean on Callan LLC a lot: they’re our investment consultant and we have them do our fee benchmarking studies,” explains Haynes. “We use [Callan] for investments, we use them for plan consulting, as well as [for information on plan compliance with] the SECURE [2.0] Act [of 2022] and other things.”

Haynes adds, “we use [consultants] as help [to] facilitate the RFI process, so that we don’t have to invent the wheel [and] we use the consultant to assist us in that [RFI] review. It’s not just a plan sponsor [responsibility]—we must use the experts.”

Working with the consultant on each search is wise for employers to meet their fiduciary responsibilities and for ensuring that meaningful comparisons are completed by plan sponsors under Department of Labor regulations, adds Haynes. 

“Regular comparison via benchmarking/RFI/RFP done by an experienced consultant is part of the DOL’s expectation of a plan sponsor’s fiduciary responsibility and necessary plan governance,” he says.

Salas O’Brien, an Irvine, California-based engineering firm did not use a consultant to complete vendor searches and vetting for health vendors, in 2022.  

“Most RFPs were done directly with particular vendors,” says Lucas Hellmer, associate vice president for compensation and benefits at Salas O’Brien “We used our benefit broker on some vendors to at least get the proposals back, but for any scoring system, we developed our own scoring tool to score out [provider RFPs].”

Hellmer adds that: “As we’re talking through with each one of those vendors, whether it’s an interview process or looking at the proposal itself, we’re giving ratings on those different areas that are the key differentiators—whether it’s educational tools, do they have a strategic focus, responsiveness, etcetera, to be able to objectively evaluate these vendors in terms of moving forward.”

Consultant Corner

Consultant assistance with designing, sorting and scoring RFPs may reveal greater depth of comparisons and insights into plan designs and characteristics on pricing and technical aspects of retirement plans, says Wendy Dominguez, president of Innovest Portfolio Solutions. 

Helping with technical aspects like pricing of investments is part of Innovest vendor searches, she says.    

“These are very technical subjects and evaluating the difference between one vendor and another can be challenging,” she says. “We believe our role is just to really show [plan sponsors] an even playing field: [because] first of all, sometimes it’s hard to get to even that because of proprietary fund requirements or yields on fixed accounts. Helping our clients understand the landscape, understand how different [requests for] proposals are put together, understand the different offerings is very valuable and a third-party can really add a tremendous amount of value, in helping plan sponsors just because of the technical nature of the bids.”

The ability of a third party to present clear pricing for investment funds or services without bias is key, Dominguez adds, based on feedback, questions and concerns she gets from plan sponsors.

Employers biggest concern  is “really on the pricing, because there are so many different scenarios  and subsidies that occur in some of these bids,” she says.

“Being able to compare everything on an apples-to- apples basis is really complicated,” Dominguez adds. “We can help [employers] understand the difference in a fixed [income] account versus a stable value fund, versus a money market [fund] and how the pricing of each of those impacts the overall record keeping costs and vice versa.”

Consultant, for Fiduciary Protection

Working with an intermediary firm can be key for plan sponsors meeting their fiduciary responsibilities under ERISA, by providing superior comparisons of different technical aspects of plans that otherwise are more time-intensive, complex and opaque.

From the perspective of fiduciary protection, plan sponsors are wise to base the decision for securing support for vendor searches depending on the specific situation, adds Oringer

If the fiduciary believes the assistance is necessary to make a good decision, the fiduciary should seek that assistance, he says.

“Then, regardless of whether the fiduciary thinks help is necessary, the fiduciary may want to consider whether an outside consultant will make the record better and help insulate the fiduciary against possible [litigation] claims,” Oringer explains. “In some cases, it will be helpful for a fiduciary defending a decision to show that additional outside help was sought. The greater the level of familiarity and expertise of the fiduciary, the less an outside consultant is necessary.”

Higher Default Auto-Escalation Rates Could Mean Fewer Opt-Outs, Voya Study Shows

401(k) plan sponsors could increase their default escalation increment to 2% to boost employee savings, according to research by Voya.

As with so many things that behavioral finance has learned by studying human activity around defined contribution plans, new research finds that regarding escalation, defaults matter. 

While DC plan participants can have the option to specify their rate of contribution escalation and the date escalation should begin when enrolling in 401(k) plan that offers those features, Voya Financial found that nearly everyone who enrolls in auto-escalation sticks with the prominently displayed default parameters of a 1% annual escalator after the first year. 

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But when designing a successful auto-escalation regime into a 401(k) plan, Voya says plan sponsors could get participants to increase their savings even more by adopting higher default escalators, according to the report “How to auto-escalate your 401(k)” published in February.  

To understand the impact of different auto-escalator settings, researchers Saurbh Bhargava, Rick Mason and Mark Patterson at Carnegie Mellon University and Schlomo Benartzi at UCLA conducted a field experiment where they varied whether an enrollee would see a default escalator of 1% or 2% and whether the start date of escalation was after a year, six months or three months in the plan. 

The researchers randomized the default auto-escalation options displayed to 22,170 new 401(k) enrollees across 398 plans. These plans used an opt-in enrollment process where employees had to choose whether to save and whether they want auto-escalation. 

Voya says this is different from automatic enrollment plans where employees are often automatically assigned escalation features. 

The researchers then observed the escalation choices of enrollees at the time of enrollment and checked in on their savings several months later. 

First, the researchers found that defaults matter, and a majority of the auto-escalation enrollees followed the default escalators and delays.  

In addition, they found that higher default escalators can lead to faster escalation of contribution levels over time. More than half of the employees who encountered the 2% default stuck with that level of escalation. The majority of the remainder switched back to 1%, but still chose to escalate. 

“Critically, the higher default escalator did not meaningfully increase the share of employees initially declining auto escalation,” the report stated. “The combination of more aggressive default escalation increments and no corresponding drop in enrollment suggests that plans could increase saving by increasing the escalation increment to 2%.” 

The study also found that a substantial share of employees were willing to escalate well before 12 months had elapsed. When promoted by the default, 54% of employees appeared willing to escalate in 90 days, and 67% in 180 days. 

“This suggests that, for the majority of employees, the ‘future’ begins within a few months,” the report stated.  

However, researchers found that more aggressive default delays, which led to escalation beginning sooner, modestly reduced escalation enrollment to 18% from 23%. 

Under the SECURE 2.0 Act of 2022, plans launched between 2023 and 2024 must escalate an employee’s contribution rate by 1% annually until it reaches a minimum of 10% or a maximum of 15%, at the discretion of the sponsor. All plans initiated in 2023 or 2024 must have this automatic feature but have until 2025 to implement them. 

Newly created 403(b) plans must also enact the automatic enrollment and escalation features. Employees can opt out of either.  

According to data from Vanguard, plan design features, like an auto-sweep, can empower workers to save at higher amounts. For example, in 2021, 14 plans using Vanguard as a recordkeeper and enrolling more than 9,100 participants, automatically increased low-savings participants to the rate necessary to receive the full employer match.  

Overall, 78% of participants had their deferrals increased, and fewer than one in four participants opted out afterward.   

Voya says there is a need for additional research to help determine the optimal escalation default needed for different types of employees. Personalized default rates can help more employees boost their savings, as well as minimize the number of employees who choose to opt out of escalation. 

“By helping workers get to the right savings rate in less time, we can design auto-escalation processes that help employees be more prepared for retirement, even in a modern labor market where people regularly change jobs,” the report states.  

According to the Bureau of Labor Statistics, the median employee tenure was only 4.3 years for men and 3.8 years for women, as of January 2022.  

Voya says the short tenure means that it is critical to get workers to the right savings rate “sooner rather than later.” 

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