Last time, in "It's a Process, Not a Purchase - Part One," I suggested that due diligence begins with self-assessment and an openness, if economics and other factors justify or lead, to change. You needn't choose the lowest cost provider. You must, however, ensure costs and fees are reasonable. In my experience, the only effective way to do that is active benchmarking. If you want to try this yourself, or if you're considering using someone to do it, here are steps that MUST be covered:

Once you've done your self-assessment, you need to identify providers who specialize in working with plans of your size. In the 401(k) world, "size" includes the number of employees you have, how many are eligible, how many are participating, how many terminated employees still have balances in the plan. It also includes the total amount of money in your plan, what funds you offer, the annual contributions by employees and by you, the plan sponsor; the amount of money flowing out of the plan through distributions and loans. Finally, size is reduced "average account balance," which is the total assets in the plan (excluding outstanding loans) divided by the number of participants (current or terminated employees) with accounts. Higher average account balances are good - you'll find a wider range of vendors interested in competing for your business; lower average account balances are not so good - some vendors will turn you away, others will bid but not aggressively compete.

Now, you need to find which providers work with plans like yours. There are, actually, a number of resources. Magazines like PLANSPONSOR and CFO publish annual surveys. Many associations for human resources professionals and finance officers have resources. Of course, on-line searches can help as well. There are directories from various sources. Try to cull a list of 20 or so because you'll be eliminating quite a few. (You may remember I said in my "90-10-10" column that we commonly reach out to 8-12 vendors. I'm suggesting you choose twice that because we've already culled the providers and, as you may remember me saying, have only two categories, "excellent" and "other." You will, using the resources I've mentioned, end up with lots of "other" whom, hopefully, you'll be able to safely exclude).

Once you have the list, go back over the first 6 columns in this series. There I detail the types of fees, expenses, charges and "revenue arrangements" you need to be looking for. Make a list; include the various titles and descriptions I've given you. You're going to need a fairly good grasp of these concepts to deal with vendors. As I've mentioned, the semantics can make this all a bit murky.

Next, contact vendors one at a time. I strongly recommend you use the telephone. DO NOT, at this stage, agree to an appointment or presentation, even on the Web. You must control the conversation. Plan to spend time with them. Give them a chance to explain, in detail, how they structure their platform, how they select investments, how they provide their services. Then ask them to explain how they deal with fees, ask them about each item on your list. Get them to help you differentiate, to understand and, here be quite frank, how EVERY ONE GETS PAID.

One more thing: Ask them to describe, very specifically, how their "stable value" or "guaranteed" account works. Ask what fees are charged; if the rates they are quoting are gross or net. Ask about MVA (Market Value Adjustment) provisions. (I know I mentioned these in my column called "Find Them." I just wanted to re-emphasize). Many providers unduly burden these accounts by weighting fees toward them to keep other charges that are somewhat more transparent seemingly low.

Next: "Counting the Cost."

The accuracy and completeness of this article are not guaranteed. The opinions expressed are those of the author(s) and are not necessarily those of Wachovia Securities or its affiliates. The material is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy.

Edward M. Lynch, Jr. is a Senior Vice President - Investment Officer with Dietz & Lynch Financial Strategies Group of Wachovia Securities in Newburyport, Massachusetts. For more information, please call Mr. Lynch at 877-609-8476. Wachovia Securities, LLC, member NYSE/SIPC.