When sponsoring a retirement plan, hiring outside experts, such as experienced, professional fiduciaries, is generally considered a smart move. What’s not smart however, is being unclear about who has what responsibilities–and ultimately liabilities. Though plan sponsors can never fully eliminate the risks they personally shoulder as ERISA fiduciaries, they can reduce them with wise outsourcing. Read on for clarity.
Responsible Outsourcing
What am I hiring someone to do? What do I retain ownership of? According to Groom Law Group’s David Levine, those are the fundamental questions retirement plan sponsors must keep front and center whenever contracting for services. Importantly, remember: no matter what services you secure to support your work as a retirement plan sponsor, your own personal liabilities as an ERISA fiduciary are never 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 publication, Meeting Your Fiduciary Responsibilities and review the expectations of your role.
With a firm grasp on the fiduciary responsibilities that are inherent to retirement plan sponsorship, it’s easier to understand how external experts can be beneficial. Recently, for example, 401ktv shared these insights from retirement industry expert, Chris Carosa, about the value professional fiduciaries can provide to both plans and sponsors:
- Expertise and standards: ERISA holds fiduciaries to a “prudent expert” standard. That expertise isn’t always available in-house, making it necessary for sponsors to engage a professional fiduciary.
- Risk management: Professional fiduciaries can help plan sponsors navigate complex regulations and other compliance concerns while potentially reducing their liability.
- Conflict of interest avoidance: Independent fiduciaries can help avoid conflicts that may arise when corporate officers serve on investment committees.
- Outsourcing responsibility: While plan sponsors retain some oversight duties and ultimate fiduciary accountability, professional fiduciaries can take on significant responsibilities, especially when it comes to investment selection, monitoring, and management (e.g., 3(38) fiduciaries).
- …. Focus on participant interests: Professional fiduciaries are duty-bound to serve the best interests of both the plan sponsor and participants, potentially leading to…improved retirement outcomes.
- Improved plan quality: The alignment of provider and plan interests through fiduciary responsibility can lead to better overall plan quality….
Understanding 3(21) and 3(38) and 3(16) Services
Having made a decision to seek expert services for the retirement plan, it is important to understand the different types of professional support available. Plan Sponsor shares this helpful overview 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) fiduciaries.
At Fiduciary News, Jeff Coons, chief risk officer at High Probability Advisors, offers this summary of how responsibilities can best be delegated to the appropriate professional fiduciaries: “Working with a professional fiduciary is the only way that a plan sponsor can truly outsource responsibility for their plan….Unless they have a 3(38) manager (for investments), a 3(16) administrator (for administration) and a 402a Named Fiduciary (for overall plan governance), their plan provider is simply assisting the plan sponsor to fulfill their responsibilities to the plan rather than delegating fiduciary responsibility for those activities to an industry professional responsible for their decisions.”
Reducing The Risks of Plan Sponsorship
Though obtaining expertise is a wise choice, and can mitigate your risks, as a retirement plan sponsor you can never fully eliminate the risk of being held personally accountable to the plan, participants and beneficiaries. Outsourcing plan services does not free you from your risks: as a sponsor, you choose the professionals serving the plan and remain ultimately accountable for their work on behalf of plan participants and beneficiaries. Specific examples of what plan sponsors can be held personally accountable for include:
- Decisions: Do you have the right advisor, and investment options?
- Cost control: Are the plan fees reasonable and services solid?
- Compliance: Do operations adhere to the plan document, and government regulations?
As a fiduciary, you can even be held accountable for failing to adequately mitigate cybersecurity threats to the plan, or to curtail the damage from a breach. You can also be held responsible for failure to monitor your chosen service providers for their adherence to cybersecurity protocols.
If you face claims that you have failed in your responsibilities as a retirement plan sponsor, the only type of protection that shields you personally is Fiduciary Liability Insurance—-with it, you’ll be armed with coverage for defense and penalties. Without Fiduciary Liability Insurance, your personal assets are exposed. As Benefits Pro sums up: “Retirement plan sponsors have enough on their plates dealing with the elements under their control, so they should pursue remedies, like fiduciary liability insurance, that relieves the exceptional burden of things they cannot control.”
Colonial Surety Company offers an efficient and affordable Fiduciary+ Cyber Liability Insurance bundle specifically to protect retirement plan sponsors. For a few dollars a day, you’ll be armed with:
- $1,000,000 for Defense and Penalties if you are faced with alleged or actual breaches of fiduciary duty.
- Cybersecurity Coverage for the business and plan, which addresses Department of Labor recommendations, and includes expert response services to curtail damage after an incident.
To make protection even easier for plan sponsors, Colonial Surety Company even helps you add the Fiduciary+ Cyber Liability Insurance to your ERISA Bond.
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