PSNC 2011: Five Things You Need to Know about Being a Fiduciary

Plan committees can’t eliminate their fiduciary liability, although they may be able to hand some of it off.  

Gisele M. Sutherland, VP and Associate General Counsel, M&I Institutional Trust Services, said in the last three to five years her firm has seen more pressure from sponsors to relieve them of fiduciary liability, but this is not legally possible. Sutherland notes that sponsors can delegate responsibilities to other professionals, and it is their duty to hire professionals when they don’t have expertise. Sponsors may rely on that expertise, but they retain fiduciary liability for selecting, monitoring and retaining providers.  

Sutherland explained the difference between 3(21) and 3(38) fiduciaries under the Employee Retirement Income Security Act (ERISA). The U.S. Department of Labor’s soon-to-come new definition of fiduciary revises 3(21) of ERISA; 3(21) covers not only investments, but management of the plan and disposition of assets. A 3(21) fiduciary sits side by side with sponsors giving guidance. It is a co-fiduciary arrangement.  

A 3(38) investment fiduciary is different, it be a registered investment adviser, bank or insurance company. A 3(38) fiduciary is responsible for investments, so sponsors do offload the decision on investments, but they keep fiduciary responsibility for selecting, monitoring and retaining a 3(38) fiduciary.  

Phyllis Klein, Senior Director, Consulting Research Group, CAPTRUST Financial Advisors, echoed a comment by Bill Heestand, President and Senior Advisor, The Heestand Company, that most sponsors take participants’ best interest to heart and are uncomfortable with handing over liability, so they usually retain services of a 3(21) fiduciary.  

In addition, Timothy Walsh, Managing Director, Product & Portfolio Management, TIAA-CREF, noted that defined contribution plan providers haven’t figured out how to price for 3(38) services because they are taking on more liability, but don’t know how much more to charge.  

There are some questions you always want to be able to say yes to.  

Klein advises there are three questions sponsors want to be able to always say yes to. First, have you read your plan document? Sutherland says the second part of that first question is, are you doing what’s in your plan document.  Klein suggests sponsors annually carve out an hour or two to look over their plan document and amendments and walk through provisions with plan providers to see how the provider implements the provisions.  

The second question sponsors want to be able to say yes to is, Do you know what you are paying.  

Heestand noted that sponsors not only want to say yes they know the fees, but should be able to show that they know the fees they are paying. Show the process of review through documentation.  

Finally, Klein noted that sponsors should know who they are paying. She says that with the new fee disclosure rules this should become more and more apparent.  

Fiduciary governance is more than just the investments.  

Klein says it really boils down to making sure a sponsor has good processes where any funds are involved, such as making contributions and distributions. And, processes should be documented.  

Sutherland notes that a directed trustee should follow appropriate directions consistent with the plan document and permissible under ERISA and the Internal Revenue Code. For administration, payment of expenses, and eligibility issues, a trustee helps facilitate, but it must also look over a sponsor’s shoulder and confirm the sponsor is following appropriate procedures.  

Heestand says the first question sponsors may be asked in a DoL audit is whether it has an Investment Policy Statement (IPS). More specifically, have you read it and are you following it. Heestnad believes more specific IPS’ are best.  

Walsh notes that in the 403(b) space, TIAA-CREF is starting to see audits asking for an IPS.  

Due diligence on service providers is a big deal.  

The panel moderator, James E. Graham, Partner, Retirement Plan Consultant, Captrust Advisors, noted that the industry used to think a request for proposals (RFP) was for changing providers and benchmarking was for measuring the success of plan and providers, but after a recent appellate court decision in George v. Kraft, it may need to rethink that. The 7th U.S. Circuit Court of Appeals decided the case would have to go to trial because Kraft hadn’t done an RFP every three years (see PSNC 2011: So, Sue Me).  

Klein says the Kraft suit does indicate there is a thought that sponsors need to do an RFP or benchmarking on a regular basis.   

Graham also pointed out that the least expensive provider is not necessarily the best, but sponsors need to look for one that helps them best do their job. He also recommends documenting the reasons for selection of providers and that ongoing monitoring of services and plan design is necessary to make sure participants are getting what they need.   

Heestand added that plan sponsors can build in some straightforward process. There are resources in the industry that give relative pricing points for plans of comparable size. According to Heestnad, there years may be extreme, but every five years sponsors should benchmark for sure. They should also benchmark when there are changes such as a merger with another company that makes the plan bigger.  

New regulations constantly change the playing field.  

Sutherland says the industry will see investment provider regulations, further guidance on 408(b)(2) disclosure regulations, and new rules for disclosures of target-date funds. She also suggests sponsors pay attention to developments due to CIGNA v. Amara case which discussed discrepancies between the plan and its Summary Plan Description. The court said the SPD does not trump the plan, but remedies are available to participants under other provisions of ERISA when a plan is miscommunicated (see PSNC 2011: So, Sue Me). Sponsors should pay attention to communications to employees, both written and verbal.