Monthly Archives: November 2016

Due Diligence Study Just as Important as an RFP Process

 

Most public plan sponsors are very diligent about conducting public bids for their defined contribution pension plans on a regular basis. Depending upon local laws or customs, most public plan sponsors conduct a formal Request for Proposal (RFP) every five to seven years.

While the formal public bid process is an important activity for every fiduciary, it is not the only way to fulfill your obligations to plan participants and beneficiaries. Every plan sponsor should conduct a “due diligence” process annually. The purpose of a due diligence study is different from an RFP process in the following ways:

  • A due diligence study compares your plan to other “similarly situated” plans in your geographic area, and to other similar plans on a national basis. This is a “plan sponsor to plan sponsor” comparison, or benchmarking, as opposed to formal responses to an RFP from vendors.
  • Due diligence studies are less formal than an RFP process, and dialogue with other plan sponsors, stakeholders, and vendors is encouraged. The RFP process is more rigid, and therefore more meaningful if it is preceded by a due diligence study. A due diligence study can help educate board members in advance of the more formal RFP process.
  • A well-executed due diligence study can be more enlightening than the RFP process because it permits a direct comparison of plan features, plan design, fees, and services with other similar plans. A formal RFP process tells you what vendors can offer in regard to these services, but it won’t tell you all the “best practices” your fellow plan sponsors are using.
  • Finally, a due diligence study permits other plan sponsors to comment on your particular plan, and to offer observations and experience with the same or similar issues.

You don’t necessarily need to hire a consultant to conduct your own due diligence study. A consultant may guide you in organizing your questions for other plan sponsors, but it is very useful for board members and staff to actually conduct the due diligence interviews on their own. A “peer to peer” discussion with other plan sponsors can be extremely useful. And, the other plan sponsors participating in your study can reciprocate by using your information for their own due diligence study.

And don’t forget vendors. Consult them on “best practices” as well. You will likely find those conversations very enlightening, especially if they are with a vendor who opted not to bid on your program the last time you issued an RFP. I recently had a call from a large public plan sponsor who was disturbed that their last RFP garnered only one response- from their current vendor. All other vendors opted to decline. I asked the plan sponsor if they had conducted a due diligence study before the RFP, and the answer was “no.” After I encouraged a few phone calls to key people in the market, this particular plan sponsor learned of three requirements in their RFP that motivated most vendors to decline. These three requirements could have been easily modified if the plan sponsor had discussions with other similarly situated plan sponsors before drafting the RFP.

There is no mandatory format for a due diligence study. Talk to others and be creative. The important thing is to have an ongoing due diligence process that is conducted annually. If you’ve not done it before, you will be surprised at what you will learn by doing so.

Gregory Seller Consulting, LLC

All rights reserved. May not be reprinted in whole or in part without written permission. Provided for information only and is not legal or investment advice. Plan sponsors should seek their own legal counsel on these issues.