As more and more defined contribution (DC) plans outsource a variety of functions, critical decisions for plan sponsors are becoming what they should be outsourcing and who they can trust. Companies are required to act as a prudent expert under ERISA but most lack the knowledge and experience so they turn to third parties for help moving the critical role of the plan sponsors to prudently selecting and monitoring the expert. The evolving landscape of DC outsourcing is reviewed by industry expert and attorney Mike Barry.
Barry recommends a three step process when companies consider outsourcing:
- What functions should be outsourced
- Creating the right contractual arrangement
- Deciding what should be retained
Two basic functions are outsourced by DC plan sponsors including: 1. Investments; and 2. Administration. Companies can choose to rely on a third party to help them select and monitor investments hiring what is called a 3(21) fiduciary or they can completely delegate that responsibility to a 3(38) fiduciary. Those plan sponsors that want to outsource administrative tasks will hire a 3(16) fiduciary. And while it seems like there is one flavor for 3(16) fiduciaries, many will just file forms and monitor while others can take a more active role in running the plan including hiring and firing services providers. A TPA in the south outlines the fiduciary hierarchy and explains in plain English what roles third parties can play to help plan sponsors fulfill their fiduciary duties.
Increased focus on examinations of DC plans by the DOL as well as the recent spate of 401(k) lawsuits is driving more plans to consider outsourcing a variety of functions for their DC plan. So as more plans move toward outsourcing, they should do so thoughtfully understanding what functions make sense for them to delegate, who they should be using and what systems are in place to monitor these third parties. Because like everything else, all DC outsourcers are not created equal as the selection and monitoring of these vendors becomes the critical role of a DC plan sponsor.
