The headline in a recent article CFO.com article by a Massachusetts based plan advisor may be provocative and perhaps inflammatory but the statement that CFOs aren’t as concerned about fiduciary liability as they should be may be well grounded. So what’s the problem and what can defined contribution (DC) plan sponsors do about it?
Many people that have discretion in running their company’s DC plan don’t believe that they are a plan fiduciary because they are not named, which is not true. Because they have a plan advisor, companies think they are adequately protected but over 60% of DC plans use an advisor not qualified or experienced enough to help companies and their committees effectively limit their liability. Most plan advisors do not or are not allowed to act as a fiduciary although the pending DOL conflict of interest rule may change all that. To make matters worse, the DOL dramatically increased their number of auditors in 2013 which resulted in almost $700 million in fines in 2015, a $100 million increase over the previous year. And if you haven’t noticed, there’s a rash of lawsuits against 401(k) plans.
There are three approaches to take when hiring a professional to help with investments:
- Plans can take on the responsibility themselves and use an advisor not acting as a fiduciary
- Plans can hire a 3(21) fiduciary who advises them on their fund selection and monitoring
- Plans can outsource the selection and monitoring of their investments to a 3(38) investment fiduciary
CAPTRUST published an article outlining the differences and benefits of each model. Using the analogy of moving, in the 1st model you decide to pack and move everything yourself taking on all liabilities. In the second model, the movers hired do not do the packing so if something is damages because of packing, the movers are not responsible. In the last model, the movers do everything and take on all liability.
Except that if you hire a mover that is not competent, or don’t properly monitor them, you are still responsible even if they are acting as a 3(38) fiduciary. CAPTRUST provides simple checklists on the duties of these fiduciaries as well as what steps plan sponsors should take in monitoring them.
