PLANSPONSOR Roadmap: Outsourcing and Provider Selection

It is not only serving as a plan provider, but selecting one as well that carries fiduciary responsibility under the Employee Retirement Income Security Act, according to speakers at the second of four sessions of PLANSPONSOR’s Roadmap Livestream Series: Fiduciary 101, “Outsourcing and Provider Selection,” held on February 18.

ERISA Section 404(a) requires fiduciaries to act solely in the interests of participants and beneficiaries and to perform all duties with the “care, skill, prudence and diligence” of a prudent person acting in the same capacity and with the same knowledge, explained Heather Bader, a partner in Faegre Drinker Biddle & Reath LLP.

“If you know that you’re lacking [in knowledge], go find that expertise,” Bader said. “You can get help.”

A recording of the full webinar is available here.

RFPs vs. Benchmarking

Bader said, based on her observations over the past several years, plan sponsors have tended to more often make requests for proposal, rather than benchmark their plans.

“It’s never worth the juice of the squeeze to go through a very detailed benchmark,” added Kim Cochrane, director of client services at Hub International Mid-Atlantic. “If you benchmark and you’re in the middle 50% of services received, you’re OK, because you’re in a ‘competitive constraint.’”

When monitoring a service provider, Bader recommended that plan sponsors consider the nature, quality and quantity of the services provided. She cautioned that outsourcing to service providers is not about finding the “lowest fee.”

“What are you receiving for the price you’re paying?” Cochrane said. “Cheaper is not always the answer.”

Cochrane added that a plan sponsor may “outgrow” a provider. As an example, she said there is no perfect recordkeeper for every client: The selection may depend upon the size and complexity of the plan. A larger plan may expect certain services that do not cost additional money, according to Cochrane.

It is “good fiduciary due diligence” to go to market for service providers every three to five years, Bader said. She also recommended plan sponsors keep “scorecards” as justification for the provider selections they make.

Types of Fiduciaries

A fiduciary who falls under Section 3(16) of ERISA is a plan administrator, Cochrane explained. If outsourced, the 3(16) role would be designated by the plan document. If no designation was made, it would fall to the plan sponsor.

“Truly taking over 3(16) duties means [doing] everything from payroll-related uploads to census submissions,” Cochrane said.

For a plan sponsor to judge whether an outsourced 3(16) fiduciary is fulfilling its duties, Cochrane said sponsors can check if they receive the notices that are supposed to be sent to participants. Plan sponsors should know what notices participants are receiving because the responsibility—including payment of fines—for failing to send out certain notices falls upon sponsors, since they are the ones hiring the service providers, Cochrane explained.

An investment adviser that falls under Section 3(21) of ERISA is what Bader called a “recommender.” An investment firm in a 3(21) role may recommend that a plan sponsor implement a change to their investment menu, but the decision is ultimately made by the plan sponsor—typically through its committee or board. A 3(21) arrangement would be suitable for a committee that wants to reduce liability but still meaningfully participate in investment decisions, Bader explained.

Meanwhile, in a Section 3(38) investment manager outsourcing arrangement, the outsourced manager has full discretionary control over the plan’s investment management, Bader explained. The 3(38) manager assumes full fiduciary responsibility and liability for the prudence of the investment decisions made. The manager also:

• Is a registered investment adviser with the SEC or a state-registered bank, insurance company or registered investment adviser;
• Has acknowledged its fiduciary status to the plan in writing; and
• Has the authority to make investment changes without having the approval of the committee.

Cochrane said that over the past six to seven years, she has seen more providers operate as 3(38) managers than as 3(21) advisers. While many investment firms may charge higher fees for 3(38) services than 3(21)—by five to 10 basis points, on average, she said—plan sponsors should keep in mind that plenty of firms do not charge higher fees for 3(38) services.