Service Agreements: Choosing to Avoid Risk

By John Iekel • October 23, 2017 • 0 Comments
  • If you choose not to have a written document, you have voluntarily chosen to increase your risk.” Ilene Ferenczy, Managing Partner of the Ferenczy Benefits Law Center, at an Oct. 23 session of the ASPPA Annual Conference at National Harbor, MD, discussed the importance of service agreements and the protection they offer.

    Almost everybody you work with has some kind of service agreement,” said Ferenczy, noting that they allow one to know the provisions and scope of a contract. For instance, they can specify the services that will be provided (or not), who is responsible for errors in prior years, and even the client’s responsibilities.

    Not only can service agreements specify responsibilities, said Ferenczy, they also can afford one protection by limiting liability and addressing dispute resolution. “There are certain risks you want to avoid,” she said, pointing out that service agreements can even protect a client. Without an agreement, she asked, how can one rely on information concerning and related to an agreement?

    Service agreements serve another purpose, too — providing a means to be in compliance with federal regulations. “We find that service agreements are an excellent place to make ERISA Section 408(b)(2) disclosures,” Ferenczy said, reminding attendees that that section of the law requires covered service providers to furnish information about services and fees, special fees on termination of a contract, revenue sharing and other indirect compensation.

    Nuts and Bolts

    So what should a service agreement entail? The aspects they can specify include: 

    • the parties to the agreement;
    • whether one party guarantees payment for the other;
    • clarifying when work begins, as well as when and how it ends;
    • defining when responsibility the plan ends, and duties and fees related to that termination;
    • specifying the plan year in which work will be done;
    • responsibility for past years’ information;
    • what services are included;
    • what services require a specific client request, and which are automatically provided if an issue they would address arises;
    • what services will not be provided; and
    • how disputes are to be resolved.

    The more you can put in your contract, the better off you are,” said Ferenczy.

    Clients, Too

    Service providers are not the only parties to a service agreements that have obligations, said Ferenczy — clients also have obligations. And a provider is generally not in breach of its duties if the client has failed to meet them, she reminded attendees. That can include providing accurate data on time, making contributions to the plan and decisions about investments, reviewing the provider’s work, notifying the provider of changes relevant to the plan and agreement, and determining whether fees and contracts are reasonable. “This I see as an area that’s absolutely critical,” she remarked.

    Dollars and Cents

    Billing issues can arise, Ferenczy said, noting that most problems with billing arise “because of client expectations not being met.” To avoid them, she suggested, a service provider should be sure to communicate what it will bill for, how it will bill the client, when the client must pay and what the consequences will be if the client fails to pay on time.


    Some mistakes with service agreements are more common than others, Ferenczy told attendees. One of the most serious is to have an agreement that is too ambiguous. If a service provider doesn’t understand it, the clients and the courts won’t either, she said, adding that courts will generally construe ambiguity against a service provider. “Don’t substitute brevity for protection,” she warned, adding, “After all, this is going to control your livelihood vis-a-vis your clients.”

    Not only that, Ferenczy said, it is a mistake to think that an agreement is not needed because the clients love the provider. “I hear that a lot,” she commented, asking attendees whether anyone loves them enough to forego thousands of dollars in errors if something happens. Similarly, she cautioned that it is a mistake to not enter into a service agreement out of fear of offending a client. “They will respect you more with a service agreement,” she said.

    Another common mistake, she said, is forgetting that the renewal of a contract requires new disclosures under ERISA Section 408(b)(2).

    Bottom Line

    Remember that written documents help, Ferenczy said, and operating without a service agreement leaves a service provider open to significant risks — risks that can be controlled with an agreement.