Duties:

What exactly is the service provider expected to do? Verbal statements made during the marketing pitch will not mean much if they are not incorporated into the written agreement. The parties should be clear as to what is expected of the provider. It is advisable to incorporate any RFP and the response into the service agreement.

Payment:

Is payment to be made in advance or in arrears? In the case of financial providers with access to fund assets, will the provider have the ability to pay itself directly from the asset pool, thereby preventing the fiduciary from controlling payment in the event of a dispute? Will consultants be receiving undisclosed fees such as 12(b)(1) fees or finder's fees in addition to the agreed upon contractual rate of compensation?

Negligence:

This is an area of growing concern. There is a concerted effort, particularly among actuarial and accounting providers, to limit liability to the amount of the fee charged. This is clearly inadequate. While some reasonable limit on liability may be appropriate, this is an area where the retirement fund must use its economic power to assert the need for responsibility on the part of all professionals serving the fund. It is also common now to see a duty of care created only where the provider is guilty of "gross negligence." This means that negligence alone is not enough to create a liability to the plan; rather, a duty would only exist not to intentionally be negligent. Again, this is an unacceptable standard for a fiduciary relationship. The duty from any provider to the plan must be clear and unequivocal. In the area of custodial agreements, claims for errors are being limited to periods far shorter than the statutes of limitations for contract violations. Essentially, a plan is on notice that it must discover an error almost before it happens. Contracts should track periods that more closely resemble the periods set forth in state law for claims based on a written contract. Any attempt by a provider of legal services to limit its liability to a plan is not only inappropriate, it most likely violates state laws concerning lawyer professional responsibility. Auditing firms, stung by substantial judgements in corporate misconduct cases, are also looking to tighten their exposure. While the accountants are entitled to rely on data received from the fund itself, misreporting by a plan sponsor must not be excused without an appropriate level of inquiry as a part of the audit.

Choice of law:

Contracts with providers in other states often incorporate the law of the provider's home jurisdiction. It should be a non-negotiable factor (except in the case of investment in a mutual fund) for all contractual relationships to be based on the law where the fund is located. Additionally, venue for any dispute (the location where any court proceedings would occur) should be in the fund's home county. Generally, a governmental entity has the right to be sued only in the county where it is headquartered. That privilege should not be waived. Many contracts require arbitration as the sole remedy. While that may prove appropriate in certain circumstances, it should not be the fund's sole remedy, but instead, should be available as an option. While arbitration is generally faster and less costly than traditional judicial remedies, it also is usually a one time, winner-take-all approach. Given the arcane nature of retirement law, it is better to have a choice.

Due diligence:

In the final analysis, good due diligence in the selection of professional service providers is the best protection against costly and unwanted disputes. Part of the due diligence process should include a discussion of the factors listed above. Discomfort by a potential provider with acceptance of responsibility is a clear indicator of potential trouble in the future. In the end, it's all in the contract.