Outsourcing 401k Fiduciary Investment Oversight – Beware the Misinformation Minefield. Plan sponsors have the option to delegate certain responsibilities under the Employee Retirement Income Security Act (ERISA). That’s a good thing, but you have to make sure you’re doing it right. There’s a lot of misinformation out there about what plan sponsors are and are not responsible for when they hire outside professionals to help them, and it’s important to know your role in those relationships so you don’t unintentionally trip on a fiduciary landmine.
A recent blog post from Alliant Wealth Advisors offers some advice on clearing up misinformation surrounding Fiduciary Investment Managers (FIM). (Alliant is an FIM for 401(k) and 403(b) plans.) A plan sponsor would typically hire an FIM to handle selection and monitoring of the plan’s investment fund lineup. Depending on the service agreement, an FIM might also provide model portfolios or managed account services. This relationship is commonly referred to as a 3(38) investment manager.
So what does this mean for the plan sponsor? Essentially, it means you have delegated your primary responsibility when it comes to choosing and monitoring plan investments and expanded your fiduciary liability protection. That said, you’re not entirely off the hook. You still have to monitor your FIM and make sure they’re acting in the best interests of your plan and participants.
Alliant points out this is where the misinformation comes into play. There are a plethora of service providers out there offering different levels of service, and some will try to tell you that they can eliminate your investment fiduciary risk entirely. That’s not actually true. As a plan sponsor, you still have to monitor your investment provider under ERISA, regardless of the level of service they provide. Without getting too deep into the weeds, just keep in mind that you need to make sure you fully understand what services your investment manager will and won’t provide, and monitor their activities closely.
In short, there’s no such thing as “set it and forget it” when you outsource all or part of your investment management responsibilities. You need to stay on top of your service providers and make sure they’re fulfilling the responsibilities they promised. That is your fiduciary responsibility under the law.
However, it doesn’t have to be time-consuming, as Alliant observes. They offer a handy checklist for supervising your FIM, and they recommend checking in on at least an annual basis. The checklist is a comprehensive list of items to confirm with your FIM, including:
- making sure they have agreed to take “discretion over your plan’s investment decisions in writing,
- asking them about changes in their investment philosophy,
- inquiring about their fees and ensuring those fees are reasonable,
- making sure they have the necessary insurance, etc.
Alliant’s checklist is about 11 questions, so presumably, you could hash them out with your FIM in a single annual meeting that would likely only take a few hours. Of course, you can check in with them more often, depending on your comfort level.
A good FIM will build their responsibilities into your investment policy statement (IPS), and come to your annual meeting prepared with adequate documentation that thoroughly addresses each item on the checklist.
Alliant explains: “If you properly supervise your FIM and document your review in meeting minutes, or otherwise, then you will have met your responsibility under ERISA and will be protected from mistakes made by your FIM if any. This model affords the highest level of plan sponsor investment protection available under ERISA, and is not difficult to comply with.”
So again, make sure you know what you’re getting when you outsource your investment management responsibilities to an outside service provider and be sure you and your provider are each fulfilling your fiduciary duties within the context of your service agreement. And watch out for misinformation — it’s rampant out there. However, careful monitoring of and regular check-ins with your service provider, along with adequate documentation of these processes, can help you avoid fiduciary landmines — a very good thing, indeed.
