It’s common practice for retirement plan sponsors to outsource services and support. Doing so is a wise move, since outsourcing frees businesses to focus on their core functions, and brings expertise to the retirement plan. Here’s where outsourcing can get confusing, however: engaging service providers does not absolve ERISA fiduciaries—like plan sponsors or committee members–from their inherent, legally binding, obligations to the plan and its participants.
Oversight Duties
When retirement plan services are outsourced, the plan sponsor and plan committee members are likely to feel a relief from some of the administrative and compliance tasks that go hand in hand with company plans, like 401ks. Nonetheless, plan sponsors and other fiduciaries, like committee members, retain responsibility (and liability) for their decisions, including decisions about outsourcing. ERISA fiduciaries can mitigate their personal risks, but never fully eliminate them, as Remy Samuels at Plan Sponsor further reports:
As plan sponsors increasingly outsource to advisers and consultants to help administer their retirement plans and keep up with compliance regulations, the need to train and educate fiduciaries on their duties does not disappear. It is largely a misconception that offloading certain responsibilities to a co-fiduciary 3(21) or a 3(38) adviser, for example, relieves a retirement plan committee of its fiduciary duties … .The focus of the plan committee shifts toward oversight and controls.
Tina Siedlecki, a senior director in the benefits and advisory and compliance group at Willis Towers Watson, says…“Even if we’re talking about full outsourcing [with] a 3(21) adviser or a 3(38), the fiduciaries can never absolve themselves of fiduciary responsibility….Whether you’re outsourcing investments for 401(k) administration or pension administration, you still have to train the fiduciaries, … the non-fiduciaries [and] the benefit team members.”
Groom Law Group’s David Levine underscores that when contracting with outsourced advisors, it is critical for plan sponsors to be absolutely clear on this question: “What am I actually hiring for and what am I still owning?” Under the high standards of ERISA, monitoring and evaluating remain essential obligations of retirement plan fiduciaries, and Levine cautions: “Marketing of pooled employer plans falsely claims that plan sponsors have less fiduciary responsibility because they are outsourcing the administration of the plan…. Fiduciaries who join a PEP still have a responsibility to monitor the provider.”
Good To Know: 3(21) and 3(38) and 3(16) Services Explained
Plan sponsors often find it confusing to understand the difference in the responsibilities of 3(21), 3(38) and 3(16) services. Plan Sponsor shares this helpful summary of the main distinctions between 3(21), 3(38) and 3(16) services:
A 3(21) adviser, or co-fiduciary, provides advice or recommendations to the plan sponsor but does not make final decisions regarding the plan’s investment lineup. A plan sponsor who uses a 3(21) is typically looking for outside investment expertise but wants to retain final discretion over the plan. In comparison, a 3(38) adviser functions as the investment manager for the plan and has the authority to make changes in the investment lineup. A 3(38) is considered a plan fiduciary…..Some plans also use a 3(16) fiduciary, a service provider that handles the day-to-day administrative work for a retirement plan. The more that plans move toward outsourcing, the more a 3(16) fiduciary can help with improved compliance, but…it is important that the plan committee monitor the 3(16) fiduciary.
Remember, no matter what services you contract to support your work as a retirement plan sponsor or committee member, your own, personal liabilities as an ERISA fiduciary are not absolved. You retain responsibility for your decisions, including decisions about outsourcing to service providers, and for monitoring and evaluating the results. It’s a wise idea to periodically revisit the Department of Labor’s guidance booklet for plan sponsors. Titled “Meeting Your Fiduciary Responsibilities,” the booklet will help you understand exactly what it means to serve as a retirement plan fiduciary.
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