Fiduciary Exposure in Vendor Contracts

Some things ring clear as a bell and so it was with the e-Alert that I received recently from my friends at Smith & Downey. The topic is the fiduciary risk to plan sponsors in vendor contracts as a result of the DOL Fiduciary Rule. 


The following, taken verbatim from their E-Alert, Employer Fiduciary Exposure/Risks to Employers in Vendor Agreements and published with their permission, is a must-read and should prompt plan sponsors who have not already done so to take action.

As we have discussed at our Seminars and in prior e-Alerts, the new DOL Fiduciary Rule (significantly expanding the definition of investment fiduciaries and imposing extensive new requirements on them) went into effect earlier this year.  One effect of this radical new Rule has been the generation of replacement service agreements by investment advisors and the delivery of these new agreements to sponsors of retirement plans, IRAs, HSAs and ESAs.  These replacement service agreements attempt to (but do not always) properly and adequately reflect the requirements of the new Rule.

These new agreements should be reviewed by ERISA counsel.  Many of our clients have used our review and recommendations to obtain revisions of these proposed replacement service agreements that not only properly include the requirements of the new Rule, but also:  1. remove provisions that create unreasonable (and potentially catastrophic) exposure for the employer; 2. add provisions strictly limiting vendor discussions with participants to “Investment Education” (as defined in DOL regs); 3. prohibit vendors from providing anything approaching “Investment Advice” (as defined in the DOL regs) to participants; and 4. add provisions indemnifying the employer from any losses caused by the vendor providing “Investment Advice” to participants.

Many of our clients also have followed our recommendation to use this review as an opportunity to engage their advisor going forward in the role of an ERISA Section 3(38) sole investment fiduciary for the plan (instead of in the historically more common role of ERISA Section 3(21) co-investment fiduciary with the employer).

These steps are more important than ever now that court decisions are beginning to be handed down in the plague of class action lawsuits against employers alleging fiduciary breaches relating to plan investments.  Some of these decisions not only have concluded that the employer breached its fiduciary duties to the plan but also required the employer to pay the attorneys' fees of the plaintiffs.  In a recent case, the plaintiffs’ attorneys’ fees award alone was $5.58M!

Fortunately, the current push-back by our clients and others against commercially unreasonable contract provisions seems to be bringing some balance back into the world of employer-vendor relationships.  Specifically, more and more vendors seem to be proposing “old school” fair and reasonable service contracts (instead of new school, over-reaching contracts that impose unreasonable risk on employers and absolve vendors from risks they should bear).  We believe this may be in response to employer RFPs which now often contain provisions like the following:

“Limitation on Proposed Service Agreement Provisions.  Please do not respond to this RFP if any service agreement you would present to us includes provisions that require us to indemnify you (for anything other than damages caused by our negligence or willful misconduct), provisions that limit in any way your liability for damages caused by you, provisions that require us to defend claims brought against you in the course of your doing business with us, and the like.”

Employers should note that these vendor agreement issues are just as critical with non-investment advisor retirement plan vendors, and for health and welfare plan and executive plan vendors.


So there you have it, friends - sage counsel from some very good attorneys.


Chuck Humphrey is principal of Law Offices of Charles G. Humphrey, a firm concentrating its practice in the field of employee benefits and fiduciary law. He is the author of the Fiduciary Responsibility eSource available at