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Most DC plan warranties are limited to the selection and monitoring of the investments under section 404(c) but there’s a caveat. The plan sponsor has to continually monitor those funds and remove them if they are no longer appropriate. To qualify under the warranty, the plan sponsor has to follow the recommendations of the provider. Are they continually conducting prudent, documented due diligence? Most lawsuits are about fees paid to the record keeper which is generally the one issuing the warranty – do you think they would put themselves in a position to defend lawsuits against themselves?
Rosenbaum warns, “A fiduciary warranty is like lightning insurance; actually I think a plan sponsor has a better chance of getting hit by lightning than a plan sponsor being defended through one of these warranties.” A better practice is when a provider assumes fiduciary responsibility under sections 3(16) (administration), 3(21) (Investment monitoring) or 3(38) (investment selection). There is no substitute for a competent vendor in either of these areas willing to be named as a co-fiduciary.
“Fiduciary warranty is a deceptive practice,” warns Rosenbaum.
He recommends that DC plan sponsors have their attorney review the warranty policy, most of which are clever marketing gimmicks with very little value. Rosenbaum ask rhetorically, “…how much is the fiduciary warranty really worth if these insurance companies are willing to give them away for free?” Ask the home owners in Long Island where Rosenbaum hails from if their coverage was all that was promised and if they wish they had read the fine print in their home owners’ policy.
