Outsourcing Fiduciary Responsibilities - A Few Thoughts on A Key Misconception
Recently Fred Barstein, of Retirement Advisor University fame, wrote an excellent little piece for Investment News on the Top 10 Fiduciary Misconceptions Among 401k Plan Sponsors. This post focuses on the misconception that fiduciary liability can be outsourced. This misconception is at the core of most plan sponsor failures and relates to several other of the misconceptions Mr. Barstein mentions. Let’s explore the topic a little more.
Most plan sponsors, particularly smaller ones, do not have the capacity or expertise to run a 401(k) plan. For them, a 401(k) plan might just as well be a box of parts for one of Elon Musk’s SpaceX rockets without the assembly instructions. Of course, plan sponsors know they can’t do it by themselves and that is why they hire advisers, recordkeepers, TPAs, and others to do just about everything for them, fiduciary and non-fiduciary.
The mindset of “I’ve got a guy” or “other people do things for me” sets a trap and means from the get-go many plan sponsors never establish an effective fiduciary management and oversight process for their plans. From the hiring of plan service providers and the selection of plan investments to the ongoing monitoring of service providers and investments, and the payment of fees, many plan sponsors are not sufficiently engaged in important plan matters, and as a result important plan interests are not protected.
So, what can plan sponsors do to make sure they are properly involved in their fiduciary duties? Here’s a short and basic list:
Know the fiduciary responsibilities that are retained after a plan responsibility, function, or task -- whether fiduciary or non-fiduciary -- is outsourced to a third party. In the real world, plan sponsors don’t know what they don’t know. So, plan advisors and other plan service providers can (and must) help inform them of this. This sets the table for positive plan sponsor involvement and oversight of their plans and will help prevent problems like the payment of excessive fees, imprudent investments, and common plan administration issues.
Establish prudent written fiduciary policies and processes for management and oversight of their plans. This includes written investment policy statements and the establishment of plan committees and charters if warranted under the circumstances.
Know what the plan says: from eligibility for participation and contributions to distributions, and loans, etc. Most importantly, know what the plan says about fiduciary responsibilities and the allocation of those responsibilities. It may or may not surprise you that many plan sponsor fiduciaries have never read their plans.
Be aware of industry and regulatory developments. Regularly seek information from plan service providers such as, advisors, consultants, and attorneys. These developments can have a consequential impact on plan fees, plan operations, and design and documentation. Good providers will proactively provide this information, but even better plan fiduciaries always ask if there is anything going on that they should know of.
If the plan is overseen by a plan committee, new members should be on-boarded with a fiduciary education that familiarizes them with the plan, plan service providers, and legal and regulatory requirements. Of course, many plans, particularly smaller ones, don’t have committees, but they do have folks who assume fiduciary responsibilities (e.g., an owner, executive, or board members). They should get the same education. Some plan sponsors have used web-based training and a customized, nutshell-type “plan fact book” for this purpose with great success.
Chuck Humphrey is the principal of Law Offices of Charles G. Humphrey and he has been engaged in the practice of ERISA and employee benefits law for over 35 years. He is the author of the Fiduciary eSource available at ERISApedia.com. He may be reached at email@example.com or 716-465-7505.