And you thought a dog was your only best friend.
Thankfully, trustees aren’t expected to know everything involved in operating a trust fund. What they are expected to do is seek out help from knowledgeable and qualified resources. A cadre of outstanding service providers truly is a trustee’s best friend.
This Monitoring a Service Provider post is Part One of our three-part series. Part Two: Hiring a Service Provider and Part Three: Service Providers as Fiduciaries, are coming soon.
Selecting and monitoring service providers, i.e. consultants, investment managers, accountants, administrators, attorneys, and actuaries – to name a few of the most common – is one key component to a trustee meeting his/her fiduciary duty.
Most trustees probably came on board long after the fund was established and service providers have already been retained. The primary duty of the trustee in that case is to monitor and periodically review the service providers to ensure optimum performance.
A Formal Review Process Makes Good Sense
No matter how happy you are with the trust’s service providers or how long they have served the trust, trustees should establish and follow a formal review process at reasonable intervals to decide if it wants to continue using the current service providers or look for replacements. (Note: Always document your review process.)
It may seem obvious but there should be a clear understanding between the board of trustees and any service provider about what the scope of duties and responsibilities are for that service provider. A service provider who has been with the trust for a long period of time may simply be operating “as usual” and its actual services may not be what are reflected in the service agreement. Reviews are a good time to ensure the services provided are in line with the services outlined in the service provider’s agreement and are what the trustees really need – make adjustments if necessary.
Comparison Shopping Is Advisable
Performance reviews are also a time when service fees should be looked at by the trustees to determine whether they continue to be reasonable. Keep in mind that nothing in the law says what fees can or can not be paid but it does require that fees paid out of plan assets be "reasonable." In order to determine whether a fee is reasonable, a trustee must understand what fees are being charged and what services are being provided for that fee.
Periodic comparison shopping is also advisable but keep in mind that fees need not be the determining factor in whether a service provider is retained.
In between reviews, trustees continue to have an obligation to monitor the service providers’ actions to ensure they are performing the agreed-upon services. At a minimum, the trustees should:
- Review the service providers’ performance. Don’t wait for the review to address deficiencies in performance.
- Read any reports they provide and ask questions where you need clarification.
- Carefully check actual fees charged.
- Ask about policies and practices (for instance: if there is a change in the law or economy, ask how the service provider is adapting).
- Follow up on participant complaints.
At some point, the trust may determine that it needs to make a change in its service providers or the trust may make a change which warrants bringing on a new type of service provider. In either case, the trustees must embark on hiring a service provider which is in and of itself is a fiduciary function. Our next post will cover Hiring a Service Provider.