For retirement plan sponsors, conducting requests for proposal is a necessary fiduciary practice. The process allows sponsors to solicit bids for various plan services, including those provided by plan advisers. Sponsors are taking the RFP process more seriously than in years past, meaning advisers need to pay attention.
During an RFP, plan-specific details like requested services, current challenges and priorities are shared, and a questionnaire is sent to a select list of prequalified candidates. Candidates then submit their custom proposals to be evaluated in an apples-to-apples fashion.
Typically, in an RFP, six candidates (including the incumbent) are invited. Two to three finalists are advanced to in-person meetings, and one is hired, or rehired. Issuing RFPs is different than benchmarking, and it should be emphasized that these are complimentary, not competing, fiduciary practices.
If it's done well, an RFP should uncover exactly what fees and services a plan can get in the current marketplace. Unlike a general benchmark report, an RFP will allow sponsors to see the exact quality of those services and the experience of the people providing those services, and allow sponsors to hire one of those candidates. While a benchmark report might show fees are on the high end, only an RFP can show if they are justified. High quality versus lower price can usually be compared.
RFP volume is on the rise. According to a new joint survey of asset owners and investment consultants conducted by Cerulli Associates and InHub, a whopping 29% of retirement plan sponsors expect to issue an RFP for an investment consultant in the next 18 months. That's more than the 18% expected for record-keeping services.
Meanwhile, consultants are seeing this, too. Sixty-three percent of investment consultants expect to receive an increased number of RFPs over the next 12 months from plan committees. None anticipate a decrease.
An RFP should occur every three to five years, or sooner if there is a service or fee issue (which plan sponsors detect through regular benchmarking). Advisers may be hesitant to encourage a client to conduct an RFP for their services, for fear of being replaced. But, consider this: The longer it's been since a plan's last formal RFP, the higher the likelihood the result will end in a replacement. Also, if high-quality services are being provided at a reasonable price, this could be a chance to strengthen a relationship and educate a current client about new services.
Time to educate
Further, nonincumbent advisers should not shy away from competing in RFPs. For advisers vying for new business, an RFP is a designated time to educate and pitch plan sponsors on services and process. It can be much more effective than emailing marketing materials every quarter, year after year, in hopes of being hired.
According to the joint Cerulli-InHub survey, 74% of asset owners with an investment consultant have gone more than five years without evaluating their consultant via a formal RFP. It is difficult to argue from a fiduciary standpoint that five years without evaluating a consultant is a reasonable amount of time. However, with technology speeding up a once cumbersome process, the number of RFPs being put on the back burner is declining.
The survey, whose respondents' median defined contribution plan size was $53 million, also showed that 75% of plan sponsors are concerned with annual retainer fees paid to investment consultants (with 34% being very concerned); 78% were concerned about obtaining value from investment consultants.
Whether advisers are on the issuing or responding side, using an RFP is a prudent and necessary practice that is finally being embraced.
Ariana Amplo is the founder and CEO of InHub, an online investment RFP management platform.