Why Understanding Shared Ownership Between Vendors is Crucial for Fiduciaries

In the intricate world of ERISA plan management, understanding the dynamics of shared ownership between vendors is not just a good-to-have—it's a necessity. The relationships between your plan’s service providers can directly influence how effectively your plan operates, how compliant it remains, and ultimately, how well it serves its participants. Without a clear grasp of these relationships, you might be exposing your plan, and by extension, yourself as a fiduciary, to unnecessary risk.

The Blurred Lines of Accountability

When vendors have shared ownership or overlapping roles, the lines of accountability can quickly become blurred. Imagine two vendors who collaborate closely—perhaps one handles recordkeeping while the other is responsible for investment management. If these two entities have shared ownership, it might seem like a seamless operation on the surface. However, when things go awry, it can be difficult to pinpoint who is responsible for what. Was it the recordkeeper’s fault that data wasn’t properly reported, or was it an issue with the investment manager’s system? This lack of clarity can lead to delays in addressing problems, increased administrative burdens, and, in some cases, potential legal liability for the fiduciary.

Risks of Conflicts of Interest

Shared ownership between vendors can also introduce conflicts of interest that might not be immediately apparent. For instance, if two vendors share ownership, they might make decisions that benefit their collective business interests rather than focusing on the best interests of your plan’s participants. This can manifest in higher fees, subpar service, or investment options that aren’t truly in line with your participants’ needs. As a fiduciary, you have a legal obligation to act solely in the interest of plan participants, and conflicts of interest can compromise your ability to fulfill this duty [3].

Impact on Plan Efficiency and Compliance

Efficiency in plan management often hinges on clear, well-defined roles and responsibilities. When vendors share ownership, there’s a risk that tasks might overlap, or worse, fall through the cracks. For example, both vendors might assume the other is responsible for a particular compliance task, leading to deadlines being missed or regulatory requirements not being met. This kind of inefficiency not only threatens the smooth operation of your plan but also increases the likelihood of non-compliance with ERISA regulations, which can result in penalties or other legal consequences [1] [2].

Mitigating the Risks

To protect your plan and fulfill your fiduciary duties, it’s essential to have a thorough understanding of any shared ownership between your vendors. This starts with due diligence during the vendor selection process—ask probing questions about ownership structures, potential conflicts of interest, and how responsibilities will be divided. Make sure that these roles are clearly documented and that there’s a process in place for resolving any disputes that may arise.

Additionally, consider the value of ongoing monitoring. Even if your vendors had clear roles at the outset, changes in their business relationships or ownership structures over time can introduce new risks. Regular check-ins and audits can help ensure that everything remains aligned with the best interests of your plan’s participants.

Conclusion

In the end, understanding shared ownership between vendors isn’t just about managing your plan effectively; it’s about protecting the participants who rely on your diligence as a fiduciary. By maintaining clear oversight and ensuring that accountability is never in question, you can help safeguard your plan against the risks that come with these complex vendor relationships. This proactive approach not only enhances your plan’s performance but also upholds your commitment to those who trust you with their retirement security [4].

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References

[1] ERISA Consultants. (n.d.). Identifying related employers: Part II control groups. Retrieved from https://erisa.com/identifying-related-employers-part-ii-control-groups/ 

[2] Employee Fiduciary. (2023, October 19). Is your company part of a controlled group? You need to know or risk 401(k) plan disqualification. Retrieved from https://www.employeefiduciary.com/blog/is-your-company-part-of-a-controlled-group-you-need-to-know-or-risk-401k-plan-disqualification 

[3] U.S. Department of Labor. (n.d.). FAQs about retirement plans and ERISA. Retrieved from https://www.dol.gov/sites/dolgov/files/EBSA/about-ebsa/our-activities/resource-center/faqs/retirement-plans-and-erisa-for-workers.pdf 

[4] Human Interest. (2023, April 7). What are controlled group 401(k)s? Pros & cons to consider. Retrieved from https://humaninterest.com/learn/articles/controlled-group-401k-owning-multiple-companies-and-offering-retirement-benefits/ 

[5] McDonald Hopkins. (n.d.). A corporate Swiss Army Knife: The Employee Stock Ownership Plan, Part 2: Shareholder transactions - navigating ERISA risks. Retrieved from https://www.mcdonaldhopkins.com/insights/news/ESOP-ERISA-risks-shareholder-transactions