As senior ERISA litigation attorney Steve Rosenberg points out in a recent blog post, a service provider with a wayward institutional client could end up in a lose-lose situation. Ignore questionable or illegal conduct and co-fiduciary liability might lead to allegations of breach and a costly fallout for the advisor. Inform authorities and one is likely to lose that client and accompanying revenue.
Referencing a Plan Adviser article entitled "Do Retirement Plan Advisers Have a Duty to 'Rat?'," Attorney Rosenberg describes this dilemma as a real problem. I concur and offer that the growth in outsourcing arrangements could be a catalyst for further friction unless all parties understand how work is to be allocated and are equally committed to a high standard of care. With over $1.2 trillion categorized as "outsourced assets," there is a lot at stake.
In 2014, the ERISA Advisory Council had an entire forum on the topic of outsourcing of employee benefit plan services. On the topic of duties, law professor Colleen E. Medill testified that "... the courts have not provided much guidance on whether one fiduciary has the right to sue another fiduciary for equitable relief under ERISA. She noted that this issue will be of increased importance as more employers and other named fiduciaries look to outsource fiduciary functions. Likely, in a co-fiduciary situation, one fiduciary is more culpable than the other. Thus, while both fiduciaries are jointly and severally liable under ERISA, the less culpable fiduciary may wish to sue the other fiduciary for damages in a contribution or similar action."
Based on my experience as an expert witness, service provider disputes can arise for a number of reasons, including, but not limited to, what I call an expectations gap wherein some task is left undone because it has not been formally assigned. In other situations, a conflict may exist that makes it hard for a third party to act independently on behalf of its institutional client. Of course, an investment committee member(s) may likewise have a conflict that impedes the advisor's ability to do what he or she is supposed to do. A pay-to-play kickback that involves a trustee with authority to hire an advisor is one example.
As I've written about many times, vetting and overseeing service providers by an investment committee is critical. As Attorney Rosenberg reminds his Boston ERISA Law blog readers, knowing one's customer is likewise important. After all, some lawsuits are brought by plan participants against both internal and outsourced fiduciaries. It is not unreasonable to conclude that working with a governance-focused client and vice versa redounds to the advantage of both buyer and seller.