Companies that sponsor defined contribution (DC) plans under EISA already know that they are fiduciaries carrying serious liability with many supporting the new DOL conflict of interest rule that expands fiduciary status to more third parties like advisors. But this expanded fiduciary status for advisors and even record keepers also expands the liability of plan sponsors who are responsible for selecting and monitoring these co-fiduciaries.
A NYC based attorney blogging for a 401k money manager explains that the DOL rule effective April 10,2017, increases the burden on plan sponsors to “…investigate deeply what their service providers are actually providing in the way of investment advice to participants—and how they’re getting paid to do that.”
Because more third parties will be acting as co-fiduciaries, plan sponsors charged with prudently selecting and monitoring them have increased exposure. And, when fiduciary advice under the DOL’s expanded definition is imbedded in a record keeper’s service, plan sponsors are liable under the following circumstances:
- Knowingly participates in or tries to conceal an act of omission by another fiduciary
- Has knowledge of another fiduciary’s breach and doesn’t make reasonable efforts to remedy the situation
- Enables another fiduciary to commit a breach because the plan sponsor has failed to comply with the “prudent man standard of care” that is a foundational principle of ERISA fiduciary responsibility
These provider services may include:
- Call centers
- Asset allocation modeling
- IRA Rollover recommendation
Many plan sponsors may believe that once an employee separates that they are not responsible for IRA services provided by the record keeper. But under the new rule, IRA advice might be considered fiduciary advice with liability coming back to plan sponsors who may be responsible to monitor the fees and services provided.
In addition to increased fiduciary liability, the new DOL rule prevents providers from prohibiting class action lawsuits in contracts with investors which many critics believe will open the floodgates to more litigation. Bottom line is that even though the DOL rule affects advisors most followed by providers, it also affects plan sponsors charged with prudently selecting and monitor these third parties.
