What Does It Mean to Outsource Fiduciary Services in a Defined Benefit Plan?

Created by Kelly Knudsen, Modified on Thu, 5 Sep at 11:40 AM by Kelly Knudsen

Outsourcing fiduciary services in a Defined Benefit (DB) plan involves engaging a third-party provider to assume specific fiduciary duties, such as investment management, plan administration, and regulatory compliance. Employers outsource these functions to reduce the complexity of managing the plan and to mitigate some of their fiduciary risks. By doing so, the organization can rely on experts to handle the technical aspects of fiduciary responsibility, but plan sponsors must still oversee the provider to ensure their services align with ERISA standards.

One of the key reasons plan sponsors outsource fiduciary services is to transfer responsibility for investment management. Under ERISA, plan sponsors are considered fiduciaries, meaning they must act solely in the best interest of plan participants. Many organizations opt to delegate this responsibility to a 3(38) investment manager, who assumes full discretion over investment decisions. This reduces the employer’s direct liability, as the 3(38) manager takes on fiduciary accountability for the plan’s investments. However, plan sponsors are still required to prudently select and monitor the manager [1] [2].

Another critical area of outsourcing is administrative services. Plan sponsors can hire a third-party administrator (TPA) or a 3(16) fiduciary to manage day-to-day operations, including recordkeeping, reporting, participant communication, and ensuring regulatory compliance. A 3(16) fiduciary takes on the legal responsibility for the administrative duties of the plan, which can significantly reduce the sponsor’s workload. Outsourcing these tasks can lead to more efficient plan operations and ensure the plan remains compliant with evolving regulations [3] [4].

Despite outsourcing these responsibilities, the plan sponsor retains a fiduciary duty to ensure the third-party provider is performing their duties appropriately. According to the Department of Labor (DOL), plan sponsors must prudently select and continually monitor outsourced fiduciaries. This means assessing the provider’s qualifications, track record, fees, and compliance with ERISA standards. Failing to properly monitor an outsourced provider can still result in fiduciary liability for the plan sponsor if any breaches occur [5] [6].

In summary, outsourcing fiduciary services for a DB plan can streamline operations and shift responsibility for certain critical functions, such as investment management and administration, to expert providers. While this reduces the sponsor’s direct involvement, careful oversight is essential to ensure compliance with fiduciary obligations and the protection of plan participants.

References:

[1] Alera Group. (2021). Top three reasons to outsource fiduciary services. Retrieved from https://aleragroup.com/insights/top-three-reasons-outsource-fiduciary-services
[2] Russell Investments. (n.d.). Outsourcing capabilities for defined contribution plans. Retrieved from https://russellinvestments.com/us/solutions/defined-contribution-plans/outsourcing-capabilities
[3] Medill, C. M. (2017). Outsourcing ERISA fiduciary responsibility. Iowa Law Review, 102(2), 547-591. Retrieved from https://ilr.law.uiowa.edu/sites/ilr.law.uiowa.edu/files/2023-02/ILR-102-2-Medill.pdf
[4] PSCA. (2021). Understanding fiduciary services: Does outsourcing work? Retrieved from https://www.psca.org/industry-intel/defined-contribution-insights/understanding-fiduciary-services-does-outsourcing-work
[5] Department of Labor. (2014). Outsourcing employee benefit plan services: ERISA Advisory Council report. Retrieved from https://www.dol.gov/sites/dolgov/files/EBSA/about-ebsa/about-us/erisa-advisory-council/2014-outsourcing-employee-benefit-plan-services.pdf
[6] Oswald Financial. (2019). What are 3(16) fiduciary services? Retrieved from https://www.oswaldfinancial.com/2019/11/outsourcing-316-fiduciary-services/