Fiduciary lawsuits continue to make headlines, but many plan sponsors don’t realize they’re operating under dangerous misconceptions about their responsibilities.
In a recent article, Carol Buckmann, Founder and Partner, Fiduciary and Plan Governance Practice Chair at law firm Cohen & Buckmann, laid out six common service provider myths that can expose plan sponsors to significant legal and financial risk.
The “someone else is in charge” myth tops the list. Many plan sponsors assume their recordkeeper is the plan administrator. Unless you have a 3(16) agreement specifically transferring that responsibility, you’re still the administrator by default. Standard recordkeeper contracts explicitly disclaim fiduciary status. That means you’re legally responsible for compliance violations and mistakes, whether you realize it or not.
Another dangerous assumption: If nobody’s complaining, everything must be fine. ERISA requires ongoing monitoring of service provider performance and fees. The DOL recommends running RFPs every three to five years. This isn’t about finding the cheapest option—it’s about documenting that you’re fulfilling your obligation to ensure fees are reasonable for the services provided. The Supreme Court made this clear in Hughes v. Northwestern University. Fiduciaries have an ongoing duty to monitor and replace underperforming investments.
Plan sponsors also get tripped up on the role of investment advisers. If your adviser makes recommendations but you make the final decisions, you’re still responsible for the prudence of those investments as a co-fiduciary. “We were just following the adviser’s recommendations” won’t hold up in court.
The myth that you must sign whatever your recordkeeper sends is particularly costly. Service agreements are negotiable, especially for larger plans. Key provisions worth negotiating include indemnification caps, statute of limitation periods, subcontractor standards, and arbitration clauses. Many standard contracts also lack strong cybersecurity protections—a growing area of fiduciary concern. Review Form 5500s and participant communications carefully, too. Penalties for late or incomplete forms add up, and participants have sued when communications promise benefits that exceed what’s in plan documents.
Fiduciary responsibilities extend beyond 401(k) plans. Welfare benefit plan administrators—those overseeing medical, drug, death, disability coverage, and certain severance plans—are fiduciaries, too. They now face the same fee disclosure requirements as retirement plans when hiring providers or making contract changes. Lawsuits targeting welfare plan fiduciaries are on the rise, particularly around pharmacy benefit manager arrangements and participant surcharges, Ms. Buckmann observed.
The final myth—that you can handle everything yourself—may be potentially the most expensive and risky. ERISA holds fiduciaries to a prudent expert standard. If you lack the time or expertise to perform certain functions, you’re required to consult outside experts. Since fiduciaries can be held personally liable for losses, skipping professional help is penny-wise and pound-foolish.
Plan sponsors don’t have to go it alone. They can outsource fiduciary responsibilities through 3(38) investment managers, 3(16) plan administrators, OCIOs, and pooled plan providers. These arrangements can significantly limit liability exposure, though plan sponsors retain responsibility for prudently hiring and monitoring these outside fiduciaries.
TL;DR: Key takeaways from Ms. Buckmann’s article? Educated fiduciaries who understand their real exposure can take proactive steps to reduce risk. Start by establishing written governance procedures that allocate responsibilities and document compliance. Make sure you have adequate fiduciary liability insurance. And most importantly, don’t let these six service provider myths guide your decisions.
