in arriving at their decision. That way, we can show the judge that, in fact, the fiduciaries were evaluating options and landed on the ones that they felt were most appropriate for their participants.”
WHO’S A FIDUCIARY?
ERISA requires that a DC plan have at least one fiduciary – that is, a person or entity either named in the written plan, or through a process described in the plan, as having control over the plan’s operation. The Employee Benefits Security Administration (EBSA) explains: “The named fiduciary can be identified by office or by name. For some plans, it may be an administrative committee or a company’s board of directors. A plan’s fiduciaries will ordinarily include the trustee, investment advisers, all individuals exercising discretion in the administration of the plan, all members of a plan’s administrative committee (if it has such a committee), and those who select committee officials. Attorneys, accountants, and actuaries generally are not fiduciaries when acting solely in their professional capacities. The key to determining whether an individual or an entity is a fiduciary is whether they are exercising discretion or control over the plan.”
For plan sponsors who lack expertise in a specific area such as investment oversight, they may want to engage an investment consultant or other experts to help them fulfill their fiduciary responsibility. In 2011, we spoke at length to David Levine of Groom Law Group regarding fiduciary rules played by plan sponsors and outside advisors, including how to understand primary ERISA fiduciary categories, and what responsibilities fit with each.
In the U.S. system, the core concept of fiduciary, Levine told us, is contained within a single category – an ERISA “3(21) fiduciary.” Beyond this basic definition are various additional roles, such as the concept of the named fiduciary, which generally is a fiduciary named either in a plan document or by a plan sponsor. A named fiduciary is the default plan fiduciary. Others, including advisors, can also be 3(21) fiduciaries. Further, a person can be a 3(16) plan administrator responsible for certain core administrative duties under ERISA. The determination of when a person is a fiduciary or not depends on their exact duties, on whether the duties are discretionary in nature, and on the financial relationship of the person to the plan. The bottom line, Levine says, is that “It’s important to carefully evaluate each situation to determine whether an individual is a fiduciary or not.”
We asked Levine about the plan design and oversight issues that require fiduciary oversight, including selecting the investment lineup and manager. In the case that the plan sponsor would prefer to outsource these duties, what should they consider? Here’s what he told us:
The role and responsibilities for each advisor should be clear and documented within a contract and, depending on the exact circumstances, potentially in the plan document as well. In some cases, the administrative and investment issues are split and managed by different advisors. It’s important that both the investment and administrative issues be addressed, and to clarify who is actually administering the plan. Without clarity, all fiduciary responsibility will, under many standardized plan documents, rest with the plan sponsor – that is, the company.
Within advisor contracts, it’s helpful to identify the exact fiduciary status of the advisor to minimize confusion as to what role the advisor is playing. Of course, each contracting situation is unique, so there is no one-size-fits-all solution.
As plan sponsors and fiduciaries finalize their agreements with providers, you need to understand if this person is really saying, “I will be named as the main fiduciary in the plan document.” Or are they saying, “I will be your co-fiduciary with you,” which really means, “I’m just a fiduciary with your existing plan fiduciary, so we’re all on the hook together”?
The bottom line, Levine told us, is that outsourcing many fiduciary duties to a third party is doable, but “it’s important to really dot the is and cross the ts because this is where people may get caught, especially if they only focus on the investments and not on the administration.”
HOW TO APPROACH OUTSOURCING DC PLAN RESOURCES
Levine told us that smaller plans will often end up with a prototype plan offered by a third-party administrator or a bundled-service provider; while larger plans may have a custom plan document but still use a third-party administrator, bundled-service provider, or independent recordkeeper. These administration providers will oftentimes manage the administration of the plan, handle all the day-to-day responsibilities, and make nondiscretionary recordkeeping decisions. Whether these providers are fiduciaries will depend on the exact circumstances of each situation, but “An advisor or consultant can play a key role in helping you figure out exactly what fees are being charged and what services are being provided by the recordkeepers and other providers.” Levine adds, “They can help you confirm and document that the fees your plan is paying are reasonable.”
The most common and typically the biggest role played by most advisors is in relation to the plan investments. In this case, the advisor can act as the fiduciary in the selection, monitoring, and retention of investment offerings for the plan. This includes vetting the managers, evaluating risk and return, and determining how the investments have done relative to peers and benchmarks. The advisor can either lead or help go through this process if the default plan fiduciary doesn’t have the time, resources, or skills to do this work internally. A plan might even hire the advisor to assume full control or discretionary oversight of the investments for the plan. In all cases, the plan fiduciary needs to define the breadth of responsibility as well as agree to the advisor’s fees. Says Levine, “Fiduciaries have a duty to properly appoint an investment manager. But once the decision is made, the risk is mostly shifted to the investment manager at that point (subject to a duty to monitor the investment manager).”
When we asked Levine what final words he had with respect to the changing role of plan sponsors and external advisors, he commented that “Too often, plan sponsors are bombarded from so many sides with information about these issues. Good advice and good support from outside parties doesn’t have to be overwhelming to plan sponsors and plan fiduciaries. In fact, it appears to be moving us in a good direction where, hopefully, it will advance the entire system’s objective as we move forward.”
HIRING AN INVESTMENT CONSULTANT
DC investment consulting is a growing profession. In PIMCO’s 2016 Defined Contribution Consulting Support and Trends Survey, the 66 participating DC consultant and advisory firms reported serving over 11,000 plan sponsor clients who together represent combined plan assets of over $4.2 trillion. These firms say they provide a broad range of services, including investment policy development and documentation, investment design, recordkeeping searches, and total plan cost or fee studies. Nearly all said they are willing to serve as a 3(21) nondiscretionary advisor – that is, they will make recommendations with respect to which investments a plan sponsor may want to select. The majority of consultants also are willing to serve in a 3(38) discretionary fiduciary capacity over such functions as manager selection, glide path oversight, and investment management. This allows the consultant to make decisions for the plan sponsor, such as which investment managers to hire. Consultants expect continued growth in discretionary services for clients, as clients may initially hire the consultant as a nondiscretionary advisor and then migrate the consultant to a discretionary role.
While hiring a consultant can help fulfill a plan’s fiduciary duty, it is important to note that plan sponsors are not necessarily protected by going with the consultant’s recommendation (no matter how well-documented that decision may be). In commenting on a recent lawsuit that followed a line of decisions that held that “independent expert advice is not a ‘whitewash,’” Fleckner said: “The court explained that a fiduciary who relies on an expert, like a consultant, should make certain that reliance on the expert’s advice is reasonably justified under the circumstances. The court cautioned that the sponsor cannot reflexively and uncritically adopt investment recommendations.”
Ultimately,
