How Does Outsourcing Affect Fiduciary Duties?

The distinction for plan sponsors between outsourcing fiduciary duties and being relieved of them entirely is clear: One is possible; the other is not. Advisers and attorneys warn that while many fiduciary responsibilities can be delegated, plan sponsors can never be entirely free of them.

“Plan sponsors need to have a really good understanding that they can never completely absolve themselves of all fiduciary responsibility because they always have the requirement to select and monitor whomever they have outsourced that responsibility to,” says Julie Doran Stewart, a senior vice president and the head of fiduciary advisory services at the Sentinel Group, based in Wakefield, Massachusetts.

Plan sponsors interested in outsourcing a range of fiduciary tasks can find ample ways to turn over responsibilities ranging from investment advisory to investment manager services. But advisers and attorneys recommend mapping out assignments thoroughly, outlining processes for monitoring and reviewing, and leaning into fiduciary education to ensure there is a prudent plan for doing so in the future.

Establishing Structure

For Benjamin Grosz, a tax and ERISA attorney and a partner in Ivins, Phillips & Barker, based in Washington, D.C., limiting fiduciary risk and deciding what to outsource begins with establishing a fiduciary committee and setting clear goals. As he notes, the plan sponsor and the plan administrator are fiduciaries. In creating a fiduciary committee, Grosz advises naming that committee as the plan administrator.

He warns, however, that should plan sponsors adopt a pre-approved plan document typically offered by financial institutions, banks, trust companies, third-party administrators and others, that document will generally default to the company as the plan administrator and fiduciary, if companies do not clearly state otherwise. Plan sponsors should always be careful when creating, drafting and amending their plan documents, whether they are using a pre-approved template document or not, he says. Unless there is a specifically designated plan administrator in the plan document, the plan sponsor is the plan administrator.

“You want to be thoughtful and intentional,” Grosz says, recommending naming an odd number of people to a fiduciary committee to avoid deadlocked votes.

He also recommends including the committee structure in the plan document, because he has seen some companies inadvertently overlook doing so. He has also observed companies specify fiduciary committee details in the plan document but then name the wrong entity in Form 5500 annual tax filings, which he warns are frequently searched by plaintiffs’ attorneys.

“They might incorrectly note or put the wrong entry in that field—and make it seem like the company has more liability—or occasionally [put in] a person’s name,” he adds.

Keeping Plan Design Top of Mind

When it comes to other fiduciaries in addition to the plan sponsor and administrator, such as individuals, they can be designated by name or title—such as stating that the plan administrator is the vice president of human resources—or a person can be a functional fiduciary, such as someone in the finance department who makes decisions on claims reviews or plan expenses.

Again, Grosz recommends being deliberate and thoughtful. He has seen plan sponsors have one committee or two—sometimes separating administrative and investment duties—depending on the sophistication of the company’s staff, as well as size of the firm and its plan. He also stresses the importance of populating the committee with people who can perform the obligations well, including by meeting regularly. If a member of the committee leaves the company or changes jobs, it is important to replace them in a timely way.

Developing and following a prudent process and documenting that process is essential, too, including by keeping meeting minutes that reflect how vendors were evaluated and specifying the request-for-proposal process or any use of consultants. Similarly, while annual reporting and audits are usually delegated to an outside accounting firm or by hiring tax and legal consultants, the fiduciary committee is ultimately responsible for making sure all these things are done, he adds.

“When it comes to litigation, nothing will definitively stop somebody from suing and naming you in a lawsuit,” Grosz says. “But if you’ve set up a good fiduciary structure, the board members and the executives and the company have a much greater chance of being dismissed out of these lawsuits if they’re not actually serving in those fiduciary roles and they’ve established and documented their good fiduciary structure.”

Reviewing plan design is essential for Marla Kreindler, a Chicago-based partner in Morgan, Lewis & Bockius. It is the first priority when Kreindler starts working with a new client to review plan documents and fiduciary governance—to make sure they are consistent with activities the sponsor wants to change or bring to the plan and specifically, when needed, to accommodate potential outsourcing.

“You want to make sure the plan has good provisions for giving flexibility to bring in third parties to outsource whatever functions they want to outsource to a third party,” Kreindler says. “If not, once you have that design idea in mind, then you go through the plan document and write the provisions to support that plan design.”

Fiduciary structure is also key for Stewart when it comes to overseeing different functions of a 3(16) administrator, which can range from limited to broad, she notes. She advises that the plan sponsor needs to dig into the specifics to understand what is actually provided to make sure the employer is covered regarding the plan’s 3(16) administrative duties. Similarly, recordkeepers can vary in the service offerings they provide.

“It’s really important that they have a full understanding of the description of services,” Stewart says. “Whether it is a 3(21) investment adviser, a 3(38) discretionary investment manager, a 3(16) administrator or even a 402(a) fiduciary that sits at the top and is responsible for all of those other functions, the plan sponsor always retains that requirement to select, monitor and, ultimately, replace if required—they can never really absolve themselves fully of their responsibility, but they can offload a lot from their plate for day-to-day activities.”

Understanding Fiduciary Variations

Stewart recommends developing a solid understanding of the level of fiduciary responsibility that any one provider is taking on and to clarify that in writing. For example, she points to different variations of 3(16) administrators, such as limited or full scope.

In the case of a limited scope 3(16), primary ERISA fiduciary responsibility remains with the plan sponsor, but required participant notice distribution, loan or distribution approvals, and Form 5500 signing are all outsourced. In contrast, the full scope 3(16) takes on all relevant duties of the 3(16) plan administrator role, allowing the plan sponsor to outsource as much day-to-day administration and associated fiduciary decisionmaking as possible, she says. In this instance, the plan sponsor is responsible just for selection and monitoring of the 3(16) provider, she adds.

On the investment side, Stewart advises plan sponsors to consider testing the outsourcing process by first hiring a provider in a 3(21) role and later upgrading the relationship to a 3(38) partnership. The progression can help the plan sponsor understand an investment adviser’s process, reliability and cadence of reporting.

“Starting with that 3(21) relationship and kicking the tires and then transitioning to a full 3(38) relationship can make sense,” she says, adding it may appeal to small- and midsize employers that lack the internal resources or time necessary to devote to the investment advice or investment management role. In other instances, Stewart points to clients that have investment expertise, such as investment advisers, but are not qualified retirement plan experts, and says they can benefit from outsourcing.

Maintaining Best Practices

Regarding selection and monitoring of outsourced fiduciaries, Stewart encourages outlining a standard operating procedure or a committee policy such as a fiduciary best practice document. This could include a plan to run an RFP every five years. She also sees the benefit of including plans in the plan documents for adding a request-for-information option, when needed, to ensure services and costs are competitive.

“Maybe you don’t need to fully benchmark every single year, but you should be doing that on a periodic basis,” she says, adding that if plan sponsors understand what they’re paying for and the services they’re getting and the day-to-day experience of the people doing the work, they have established a routine practice.

Another technique Stewart suggests to ensure fees are reasonable and that plan sponsors are getting the services they deserve is to ask providers, such as a recordkeeper the plan has retained for 10 years, for a presentation they would make to a brand-new client. As Stewart notes, a plan sponsor could be pleased with the service overall, but in not making changes over time, may have missed some new features or offerings, making it part of the prudent search process to review periodically, even if the plan sponsor stays the course.

Providing fiduciary training on a regular basis is also essential. Stewart advises it is especially important if there is turnover on committees to ensure everyone is operating from the same perspective.

“Generally speaking, wrongdoing is not out of malice, it’s out of ignorance,” Stewart says. “So we want to make sure that the plan sponsors actually understand what it is they are held to from a fiduciary perspective and that they’re operating accordingly.”

Grosz points out that the fiduciary process itself is key.

“On some level, there’s an oversight buck that always stops that you can’t get rid of,” Grosz says. “But if you have a good fiduciary process and you follow it, courts and judges are less likely to second-guess your decisions based on outcomes.”

More on this topic:

	What Does It Mean to Be a Fiduciary?
	How the 401(k) Alts Debate Raises Fiduciary Stakes