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Fiduciary Fitness Part 2: Outsourcing responsibility

Retirement Plans Plan Sponsors

In Fiduciary Fitness Part 1, we talked about the roles and responsibilities of a fiduciary. In this article, we’ll dive a little deeper and talk about the kinds of fiduciary duties that can be outsourced, what that means, and what your role is.

Let’s start by being very clear – if you are a fiduciary, you can never fully delegate your responsibilities. Even if you hire a professional to manage every aspect of the plan, you are still ultimately responsible for making the decision about who you hired and retained to provide those services. With that said, you can receive a lot of help from professionals in a number of different respects.

There are different kinds of fiduciary help, identified by ERISA Code Sections. The three most common are ERISA 3(21), ERISA 3(38), and ERISA 3(16). Let’s take a closer look.

ERISA 3(21) – Remember Functional Fiduciary’s from Part 1 This Code Section covers functional fiduciaries in particular, and is often referenced when you are looking to hire a financial professional to provide investment advice to the plan. In these situations, the advisory firm you are looking to hire will meet with the committee, provide investment advice, monitoring, and make recommendations to the committee. The final decision about their recommendations will rest with the committee. If your plan committee wants professional guidance, but still wants a say in the investment lineup offered to your participants, an ERISA 3(21) might be the right fit for you.

ERISA 3(38) – In this Code Section, full discretion investment fiduciaries are covered. These are “Investment Managers” that are providing investment guidance, oversight, monitoring and recommendations. However, unlike the 3(21), a financial professional acting in this capacity has full discretion over the investment options available to participants. If your committee would rather delegate the selection of investments altogether and would be comfortable not having the final say in the investment lineup, an ERISA 3(38) fiduciary might be the right option.

ERISA 3(16) – Plan Administrator. This might be among the more confusing of the Code Sections because it includes fiduciary and non-fiduciary tasks and the language is a little confusing. What comes to mind when you hear the words “Plan Administrator?” If your first thought is that this is the service provider who is administering your plan, or your TPA (Third Party Administrator) you’d be wrong. Generally, the Plan Sponsor is also the Plan Administrator. Why? Because what this Code Section is really talking about are the ministerial components of the plan, which start in Human Resources.

Some of tasks are non-fiduciary in nature and are supported by your TPA or Recordkeeper. Things like applying eligibility rules, preparing participant notices, preparing your 5500, creating statements, or maintaining records.

Others tasks are fiduciary in nature such as selecting providers, approving loans, or interpreting the plan document. Your committee could decide to outsource some of this to a TPA. But be careful when delegating responsibility. Make sure you understand what tasks the TPA will take on and if they are fiduciary in nature.  For example, a TPA may agree to approve loans but won’t interpret the document, or they may take on non-fiduciary roles such as sending out notices. Certainly, that’s a help to you and your committee, but it is not a fiduciary act.  

The decision about who you hire and how you monitor their performance is an important one.  If it’s been a while since you’ve evaluated your service providers and talked about the various roles they are serving, we can help.

This information was developed as a general guide to educate plan sponsors, but is not intended as authoritative guidance or tax or legal advice.  Each plan has unique requirements, and you should consult your attorney or tax advisor for guidance on your specific situation.  In no way does advisor assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations.