To successfully operate a retirement plan, plan fiduciaries need help from a variety of service providers, such as recordkeepers, investment consultants, attorneys, financial advisors, accountants, auditors and actuaries. Hiring a service provider involves:

After plan fiduciaries select a service provider, the terms and conditions of the parties' obligations should be documented in a service provider agreement. Both legal and practical issues need to be addressed, and certain provisions tend to be heavily negotiated. PLC's Practice Note, Negotiating ERISA Service Provider Agreements, co-authored with Sarah E. Downie, of Orrick, Herrington & Sutcliffe, LLP, analyzes typical provisions of a service provider agreement and provides practical negotiating tips from both the plan fiduciary and the service provider perspectives. While selected portions from the Practice Note follow, see the full Practice Note for more helpful guidance.

Several of the most heavily negotiated provisions in a service provider agreement include:

Plan fiduciaries and service providers should agree on the precise scope of services to be provided to the plan and the associated fees before the service provider begins providing services. Many large recordkeepers or third-party administrators provide a schedule of available services to the plan as an addendum to their core services agreement. In particular, plan fiduciaries and service providers should:

ERISA prohibits a party in interest from providing services to a covered plan unless the transaction is exempted. ERISA defines party in interest broadly and includes service providers to plans as well as many of their affiliates (see Status as a Party in Interest Checklist). An exemption to the prohibited transaction rules under ERISA Section 408(b)(2) allows compensation to be paid to a service provider if:

Regulations under ERISA Section 408(b)(2) address what constitutes a reasonable contract or arrangement. These regulations:

While the regulations do not require the responsible plan fiduciaries or service provider to document compensation and fee disclosures in the plan's services agreement, the services agreement is the most likely place to set out each party's responsibilities regarding these disclosures. It also provides the plan and its fiduciaries with a contractual basis for challenging a service provider's failure to comply with these rules (see Practice Note, Service Provider Disclosure Requirements for Pension Plans). Therefore, best practice is for compensation and fee disclosures to be clearly documented in the services agreement.

In addition, regulations issued under ERISA Section 404(a) require plan sponsors to provide certain plan, investment and fee-related information to plan participants (see Practice Note, Fee and Investment Disclosure Requirements for Participant-Directed Plans). Service providers are usually better positioned than the plan sponsors to prepare and provide the information in the form required by the regulations. If a plan intends to pay its service providers to aggregate and disseminate this information, it must negotiate with its service providers on the extent of the services to be provided. Any additional services provided to the plan in connection with the ERISA Section 404(a) regulations should be documented in an addendum to the services agreement or in a separate form agreement.

Limitation of liability and indemnification provisions are often the most significant and heavily negotiated provisions of service provider agreements. There are compelling business reasons from both the service provider and plan sponsor's (concerning indemnification) perspective to include these provisions. Both parties should also consider the legal impact of these provisions to ensure their inclusion does not cause the agreement to violate ERISA and applicable DOL guidance.

ERISA Section 410 specifically prohibits a fiduciary from obtaining a release from liability resulting from fiduciary breach (this type of provision is "void as against public policy"). Therefore, a provision that indemnifies a fiduciary against liability resulting from breach of fiduciary responsibility by the service provider is unenforceable. Plan fiduciaries acting on behalf of the plan sponsor should ensure that the plan sponsor and the plan are protected from liability resulting from:

Service providers will likely seek indemnification provisions that operate in favor of the providers and for provisions limiting their liability. Plan sponsors should consider whether including these provisions breaches the plan sponsor's (acting as plan administrator) duty to act in the best interests of plan participants. DOL Advisory Opinion 2002-08A indicates that it is not a breach of fiduciary duty simply for a plan fiduciary to enter into a contract with a service provider that contains a limitation of liability or indemnification provision. However, the plan cannot indemnify a service provider for fraud or willful misconduct.

Because termination of the services agreement can have a significant effect on plan administration, both parties have clear business incentives to clarify in advance the termination procedures. In particular, transition assistance provisions should be the subject of discussions and should be documented in the services agreement. The plan sponsor is likely to negotiate for provisions that ensure an even and smooth transition to a replacement service provider. All termination provisions should take into account ERISA Section 408(b)(2) which provides that the agreement must permit the plan or plan sponsor to terminate the arrangement at any time upon short notice and without penalty (see Practice Note, Service Provider Disclosure Requirements for Pension Plans).

For more information on drafting service provider agreements, see Practice Note, Negotiating ERISA Service Provider Agreements.