Senior Counsel
Many 401(k) plans rely on an administrative routine that entails periodic meetings with plan advisors; review of advisor reports on fees, participant usage and investment performance; and preparation of minutes of any decisions made at advisor meetings. But this procedure, by itself, may be insufficient to satisfy applicable ERISA fiduciary standards. Active input is required by the in-house persons tasked with looking after the plan. Whether they are formally designated as plan trustees or retirement plan committee members, they are fiduciaries to the plan. In addition to attending periodic meetings with the plan advisors, they should evaluate provider fees, services, and investment results. And deliberations on these matters should be separately documented. In other words, the in-house fiduciaries must actively conduct the process of “monitoring” the activities of plan service providers.
A summary of the actions in-house fiduciaries need to take would include “benchmarking” the plan’s fees, services and investment results. Although benchmarking could be based on a compilation of publicly available data, it is also possible to engage an information service independent of the regular service providers to provide responsive information on an industry-wide basis. This way a 401(k) sponsoring employer will know what a comparable plan pays for investment advice as well as administrative, recordkeeping, and custodial services. Even further, the U.S. Department of Labor has suggested that plan administrators should request competitive quotes for comparable plan services every few years to make sure the incumbent service providers are doing their respective jobs at a reasonable price.
Specific rules concerning the selection of a retirement plan “designated investment alternative” have recently been proposed by the Department of Labor. These rules provide guidance for plan fiduciaries in the selection of investments including non-traditional investments such as private equity funds and cryptocurrency. Factors that plan fiduciaries should consider are an investment’s performance, fees, liquidity, periodic valuation, performance benchmarks and “complexity” as detailed in the proposed rules. Although these factors are specifically applicable to investments that may not have a readily determined market value, they are nonetheless instructive as to what plan fiduciaries should consider in evaluating more traditional plan investments like exchange traded funds (ETFs) and mutual funds.
Also bear in mind that this fiduciary responsibility cannot be exclusively allocated to an outside service provider. This is because the employer which sponsors a 401(K) or other retirement plan is typically designated as the “plan administrator” in the plan documents. This means the employer has overall responsibility for operating the plan - including the duty to responsibly select and monitor all plan service providers. A third-party administrator (or TPA) may do almost everything for the plan but that does not relieve the employer from the obligations imposed on it as the designated “plan administrator.”
TAKEAWAY:
The title to this blurb asks, “Who checks on your 401(k) plan’s service providers?” The answer is - the plan’s sponsoring employer including any employees tasked with administrative duties. So, no matter how comfortable the employer’s relationship with its plan service providers may be, the employer needs to proactively consider alternatives from time to time. The convenience of a comfortable relationship does not excuse an employer from the activities required to properly monitor its plan service providers.
Andrew S. Williams has practiced in the employee benefits and ERISA arena since ERISA was passed in 1974. He has been recognized by his peers through a survey conducted by Leading Lawyers Network as among the top 5 percent of Illinois lawyers in Small, Closely and Privately Held Business Law and Employee Benefit Law. He maintains a website, www.BenefitsLawGroupofChicago.com, with additional updates, commentary and analysis on benefits and employment topics.
The above material is intended for general information purposes and should not be relied on or construed as professional advice. Under the applicable Illinois Rules of Professional Conduct, the contents of this e-mail may be considered to be attorney advertising. The transmission of this information is not intended to create, and receipt of it does not create a lawyer-client relationship.