10 Best Practices in Using Service Agreements

By John Ortman • November 03, 2014 • 0 Comments

Why does a TPA need a service agreement, anyway? Shouldn’t a handshake be good enough? Of course it’s not, as all TPAs know — that’s what service agreements are for. “We need service agreements to meet our legal responsibilities for fee disclosure. We need them so that we don’t get sued, ‘or sc.rewed’ on fees, and to protect ourselves if either happens,” says Summit Benefits’ Norman Levinrad.

Levinrad, joined by co-panelist Nicholas J. White of the Trucker Huss law firm, outlined best practices in crafting and using service agreements at a workshop session at the 2014 ASPPA Annual Conference Oct. 29.

Using a service agreement on most engagements is a simple matter of risk and return, Levinrad noted: “Without a service agreement, if there is a dispute, it will fall to the lawyers to sort it out.” This can mean a lengthy, back-and-forth process at great expense, he pointed out. — Levinrad uses a service agreement for all work his firm does for plan sponsors. On larger projects, he uses a retainer.

10 Best Practices

What should be in a service agreement? Levinrad outlined 10 key elements:

  • Detail the services you provide. This means listing exactly what you will do and what is covered by your fee, as well as what services you can do but will bill extra for.
  • Detail the services you don’t provide. Typically these include trustee services, investment advice, legal services, paying IRS filing fees or PBGC premiums, preparing an IPS, accounting services and more.
  • The cost of your services. If you are a CSP, list the cost of providing 408(b)(2) required disclosures. If you’re not a CSP, you must disclose whether you will receive revenue sharing or other indirect payments. If you don’t cover fees sufficiently, it can lead to unrealistic assumptions by the client, Levinrad noted, “and that is fertile ground for lawsuits.”
  • Details, details, details. Specify when you will bill the client, and what happens if payment is late. Detail what will happen f the agreement is terminated before all work is completed and where the client has prepaid some of the fees. Specify when clients can expect responses to emails and phone calls, and when your office is closed. Specify who should sign the agreement (it’s best to list both the client and the trustee so you can be paid by either), and how either party can end the agreement.
  • Takeover plans. Address the process of taking over the plan. To what extent can you rely of the work of your predecessor? Do you charge extra for reviewing their work? Your liabilities and fees regarding takeovers should be specified in the service agreement.
  • Client’s responsibilities. Be specific about what data you need to receive from the client and when you need to receive it — and detail any extra fees that may apply if you don’t receive it on time. Also specify what the client needs to do when they receive instructions from you — for example, they must respond or take action, like signing a Form 5500, within seven days.
  • Indemnification. Be sure that the service agreement includes an indemnification provision requiring the client to pay for: (1) your hard and soft costs associated with lawsuits brought by participants or third parties; (2) enforcement actions by government agencies; (3) the cost of producing documents; and (4) costs associated with providing testimony. 
  • Ownership of work product. Your agreement should make it clear that you own your own internal work papers, checklists and records. It should also specify whether you want to be able to charge the client for copies of material provided to them previously.
  • Executing new agreements. Many TPAs send clients a new service agreement when terms or fees change, providing 30 days’ notice. Levinrad recommends sending each client a new agreement annually, however, even if there are no changes.
  • Firing the client. When terminating a client, be sure to provide appropriate notice, as well as appropriate instructions about what to do after you have exited the engagement, Levinrad warned. For example, firing a client on Oct. 13, two days before the Form 5500 is due, could be viewed by a court or regulators as bad faith.

Fiduciary Status

What the service agreement says — or doesn’t say — about your fiduciary status can affect the outcome of litigation, White noted. “Courts do read service agreements,” he warned. It’s especially important to avoid becoming a functional fiduciary in the eyes of a court by your actions, regardless of what the service agreements says, he said.

A service agreement should limit your liability, White advised, such as for: 

  • Out-of-pocket damages (that is, no punitive or consequential damages).
  • Limiting the dollar amount of damages (such as the policy limit or a multiple of your annual fees). Remember that you can negotiate higher fees in exchange for agreeing to higher liability limits.

White recommended following the DOL guidance in DOL Advisory Opinion 2002-08A on liability and indemnification provisions in a service agreement. Remember that you cannot protect yourself from liability resulting from fraud or willful misconduct, he emphasized.