Managing fiduciary responsibilities is an ongoing concern for all plan sponsors. Many of them might not be aware that they can outsource some of those responsibilities to help them remain in compliance. Plan sponsors can choose various levels of fiduciary outsourcing: complete outsourcing through a 3(16) professional plan administrator or outsourcing just a component of a plan fiduciary’s responsibilities. As advantageous as this might sound to many plan sponsors, a PLANSPONSOR discussion with Joe Frustaglio, vice president of private-sector retirement plan sales for Nationwide Financial; Rich Landsberg, director in the Advanced Consulting Group for Nationwide Financial; and Jeff Atwell, senior vice president of Trust Retirement Division American National Bank of Texas, showed that the decision to outsource requires serious thought and due diligence.
PS: How can a plan sponsor determine whether to outsource any part of the fiduciary function?
Frustaglio: Plan sponsors have varying comfort levels and resources when it comes to managing their fiduciary responsibilities. When considering outsourcing fiduciary responsibilities, plan sponsors, should evaluate: 1) whether they have the time, knowledge and resources to retain that responsibility within their firm; 2) would they want to outsource a part of the responsibility; or 3) do they want to outsource as much as the law and regulations allow?
Let me use a car analogy: When you purchase a new car, you have a responsibility to maintain that car to ensure its performance. If you are not an automobile expert, that responsibility requires you to find the right experts and professionals.
It’s very similar for a plan sponsor. They have responsibility for the plan’s performance and many times must seek out the professionals who can help them maintain the plan and ensure plan performance.
PS: What options do plan sponsors have in outsourcing fiduciary functions?
Landsberg: When it was created, the Employee Retirement Income Security Act of 1974 (ERISA) envisioned multiple fiduciary service providers. So, in ERISA not all fiduciary duties are vested in one person or entity. In terms of expertise, all aspects of plan management and operation generally aren’t going to be vested with one person. You can delegate to others, including a 3(16) plan administrator, a 3(38) investment manager and a 3(21) investment adviser.
PS: Is there a best candidate for outsourcing, and if so, who is it?
Atwell: The best candidate is a plan sponsor that is concerned by the fact that the plan has three regulatory components that must be adhered to at all times: the Internal Revenue Code (IRC) and the regulations thereunder, ERISA and the regulations thereunder, and the plan document. To ease concerns and ensure compliance with those three regulatory components, plan sponsors should seek out professionals to assist them in that regard, such as third-party administrators (TPAs), quality recordkeepers and named fiduciaries.
PS: What should a plan sponsor look for when selecting an outside fiduciary?
Atwell: It’s very important that the selection and monitoring process of that fiduciary be well-documented, and that the selection process includes the following questions:
- What experience does the firm have?
- Does it have adequate fiduciary liability coverage?
- Are there any conflicts of interest?
The liability coverage is especially important because if there is a breach of fiduciary duty and that fiduciary does not have the financial means to meet that responsibility, the plan sponsor will be held financially responsible.
Landsberg: Also, plan sponsors should consider what type of help they want and need. For example, a plan administrator under 3(16) can be appointed by the named fiduciary in the plan document, but it’s important to realize that a 3(16) from a plan administrative sense literally takes on the management and the operation of the entire plan. That means reporting to the government, disclosure to participants, plan qualification and operations, contributions, withdrawals, distributions, plan asset management and general plan operations like coverage testing and eligibility. A 3(16) plan administrator is in charge of all communications with plan participants, the government and any party to or from the plan. So, appointing a 3(16) can help alleviate a significant burden.
PS: What is the required oversight that the plan sponsor needs to maintain?
Landsberg: With regard to oversight and supervising, that comes down to the duty to monitor. It requires plan fiduciaries to make consistent evaluations of decisions regarding not just investments but all operations of the plan.
Plan sponsors need to demonstrate that their process in reaching their decision was deliberate and prudent. Generally speaking, assessments are done on a quarterly basis. These reviews will indicate whether plan sponsors should conduct a more wide-ranging assessment of something. It can range from investment selection to recordkeeping, cost, compensation or service. However, the oversight process should focus on having a consistent, well-documented process just as much as results.
Atwell: In addition, the oversight process should include a review of the services that have been performed by the fiduciary and ensure that there are no conflicts of interest. This should be documented on an ongoing basis, because if there is a conflict of interest, then that fiduciary could not fulfill the responsibility of having one hundred percent loyalty to the participants and beneficiaries of the plan.
PS: What kind of protection does outsourcing fiduciary responsibilities have for a plan sponsor?
Landsberg: To carry out their duties of fiduciary conduct, fiduciaries must make decisions that are informed, reasoned and based upon the information they’ve gathered and evaluated.
Plan sponsors cannot alleviate their fiduciary duty to monitor outside fiduciaries and experts. By making use of 3(16)s or 3(21)s or 3(38)s, the plan sponsor is taking a giant leap forward in mitigating their fiduciary risks and burdens.
Frustaglio: Each plan sponsor needs to decide what level of fiduciary responsibility and legal liability they want to assume in connection with operating their plan. Fortunately, there are independent, outside fiduciary service providers available who can greatly mitigate this burden.
I’ll go back to my car analogy. I’ll sleep better at night knowing that I have utilized experts to maintain my car. The same is true with a retirement plan. If I am a plan sponsor, I want to know that the plan is being taken care of by the most qualified people in the industry. If something should go awry, I would want the peace of mind of going to the experts for help and answers.
Once you go through that process, and you hire the people who are qualified to help you manage the plan, you have satisfied that portion of your fiduciary responsibility.
The Nationwide Group Retirement Series includes unregistered group fixed and variable annuities and trust programs. The unregistered group fixed and variable annuities are issued by Nationwide Life Insurance Company. Trust programs and trust services are offered by Nationwide Trust Company, FSB, a division of Nationwide Bank. Nationwide Investment Services Corporation, member FINRA. In MI only: Nationwide Investment Svcs. Corporation. Nationwide Mutual Insurance Company and Affiliated Companies, Home Office: Columbus, OH 43215-2220.
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