Fiduciary Liability and Outsourcing

Nobody likes liability. That’s why discussing the fiduciary liability that goes with your business retirement plan is so important. Here’s why:

Any plan fiduciary who breaches the fiduciary responsibility provisions of the Employee Retirement Income Security Act of 1974 (ERISA) is personally liable to make good to the plan any losses suffered by the plan and return all profits made through the improper use of plan assets.

There’s no corporate shield for this one. Fiduciary liability is a big responsibility for plan sponsors, the plan committee, and those involved with running an organization's retirement plan for the benefit of the participants. Here are things you should know about fiduciary liability and how outsourcing can possibly help ease the burden.

Fiduciary Liability: Basics

It's that time of year where we've finished compliance testing and we're moving into the 5500s, and one of the questions that always comes up is, "What's your current fidelity bond coverage so that we can report that on your 5500?" The fidelity bond protects the plan in case something goes wrong (e.g. money goes missing), while fiduciary liability insurance covers the acts of the people who are charged with managing the plan in the capacity of ERISA fiduciaries. As ERISA fiduciaries, they have special status and must live up to certain standards.

To help better explain the term "fiduciary oversight" and what it entails, I turned to Bard (Google's AI feature) and asked it to explain in terms a fifth-grader would understand. Here's what it spat out:

"Fiduciary oversight is a fancy way of saying that someone has been given the responsibility to take care of something important for someone else. For example, a parent has fiduciary oversight over their child's money. This means that the parent has to make sure the child's money is used for the child's benefit, and not for the parent's benefit.

It's important for people with fiduciary oversight to be honest and trustworthy. They should always act in the best interests of the person or the group they are responsible for."

Great, concise answer, chatbot.

I then asked Bard what duties a retirement plan fiduciary had, and the results were accurate (pretty sure it pulled these directly from DOL’s website):

"The duties of a retirement plan fiduciary are complex and varied, depending on the specific type of plan. The most important duties include acting in the best interest of the plan participants and beneficiaries; diversifying plan investments; paying reasonable fees; avoiding conflicts of interest; keeping records accurately; and administering the plan in accordance with its terms."

Under ERISA, if you have fiduciary liability for a retirement plan, you are personally liable if something goes wrong and you are sued. Remember, there's no corporate shield here - you would rely on that fiduciary liability insurance, your plan documents, and your meeting minutes and documentation of decision making in case someone says you didn't do something right. 

You might be thinking at this point, Is there a way I can get someone else to handle some of these fiduciary duties (for example, hiring someone to oversee the investments)? Yes, you can! You can hire prudent experts to manage aspects of your plan, but you still need to monitor those service providers and still retain the liability for doing so.

Hiring a retirement plan advisor like us can be a good move - just make sure you get one that specializes in retirement plans, because their role has changed quite a bit in the last decade or so, and you need one that knows the current laws and best practices around retirement plans. 

There are two main types of retirement plan advisors, named for the sections of the ERISA code they go with:

1) An ERISA 3(38), or discretionary investment advisor. You are allowing them to make the investment decisions; the plan sponsor does not need to be consulted before any investment changes are executed.

2) An ERISA 3(21), or co-fiduciary investment advisor. You are sharing liability with them for the decisions about the investments in the plan. You get the final say-so in what happens and execute the change.

No matter which type you hire, you'll need to decide which responsibilities are the advisor's and which are yours. However you divvy up the duties, you still have to monitor the advisor and be at least somewhat involved. You may not be able to totally get rid of your fiduciary liability, but you can shift it around a bit.

The Duty to Deliver Notices

Investments are only one part of the plan. Plan fiduciaries are also responsible for delivering important information in the form of notices and disclosures timely.

There are lots of notices. This could include QDIA, 404(a)5, auto-enrollment, safe harbor… there could be others. We see a lot of inconsistency with notice delivery from recordkeepers. For example, if you have a qualified default investment alternative (e.g. a target date fund) in your plan, your plan's participants should get a QDIA notice. There happens to be one recordkeeper that doesn't send that notice, instead leaving it to the plan sponsor, but will deliver all the others. Same goes for safe harbor – there’s one recordkeeper that requires the plan sponsor to request that they prepare it, but generates and delivers all the other required notices automatically. Where does the ultimate responsibility for that notice lie? With the plan sponsor.

An ERISA 3(16) administrator can take the liability for generating, reviewing, and/or delivering notices to your employees in the right manner, but make sure to go over your contract with them. There is likely going to be some limits on liability on their end, and you need to know what those are.

What About PEPs, MEPs or Other Group Plans?

If you've joined a PEP (Pooled Employer Plan) or other group plan, you may think you're off the hook because you’ve now made other service providers responsible and liable for the plan.. Not so - you still have a duty to ensure that the decision to go with a/that PEP was a good one. If your PEP provider (or one of your providers) is being negligent, you need to know that so that you can switch, if necessary. Make sure to have an ERISA attorney go over your contract, and know what duties you are still responsible for. Fun anecdote: when problems with group plans have been found in the past, those problems were identified by a participating employer. The checks and balances in these situations are extremely important.

Takeaways

1) If you're a plan fiduciary, think about having fiduciary liability insurance.

2) If Google’s AI, Bard, knows it, so do the plaintiff's attorneys.

3) If you’re a fiduciary, get trained and leverage your service providers to help.

4) If you need a retirement plan advisor to explain some (or all) of this stuff, contact us!