According to a 2014 statement, the ERISA Advisory Council intends to investigate the nature of retirement plan outsourcing and report its research to the U.S. Department of Labor ("DOL"). "Outsourcing Employee Benefit Plan Services" cites objectives to include the following:
- Discussion about current practices in outsourcing and whether variables such as plan size or type impact the services provided to ERISA plans;
- Clarification of "the legal framework under ERISA for retaining outsourced service providers..." and possible areas for regulatory guidance;
- Getting suggestions about the management of potential conflicts of interest;
- Further discussing the "scope of co-fiduciary liability in the outsourcing context" for 3(16), 3(21) and 3(38) relationships;
- Discussion about how contracts are put together between an ERISA plan and a service provider to address issues such as termination rights, indemnification, liability caps; and
- Examination of insurance coverage and ERISA bonds when an outsourcing arrangement exists.
This news is not particularly surprising. The topic of fiduciary management continues to attract attention, in part because it appears to be growing as a business model in the United States, United Kingdom and elsewhere. According to a survey of 73 pension plans and their advisors, Buck Consultants found that 70% "had at least considered going down that route." For those schemes that that had engaged a fiduciary manager, they cited motivations such as "improved speed in the decision making process, greater focus on the end game, and improved expertise." At the same time, UK-based Brian McCauley, Head of Fiduciary Evaluation at Buck Consultants, added that the governance burden is still "huge." In "Perceptions of Fiduciary Management," Stephenson Harwood attorney Fraser Sparks addresses concern about conceivable conflict of interest trouble spots when "an advisor turns into a provider." One offered solution is to engage an independent third party to evaluate the qualitative and quantitative characteristics of fiduciary manager short list candidates.
Stateside, ERISA legal experts debate the pros and cons of the outsourced fiduciary approach. In "New flavor of outsourced fiduciary for retirement plans hits the market" Investment News reporter Darla Mercado writes that "This latest service offering is popping up in an era when plan sponsors have a heightened awareness of their fiduciary responsibilities and are looking to offload some of them so that they can get back to the day-to-day work of running their business." Drinker Biddle & Reath attorney, C. Frederick Reish, talks about "3(16) lite" and the need to "[r]ead the fine print." The April 2, 2014 piece emphasizes that "...plan sponsors still have the responsibility of choosing and monitoring their service providers."
In "Expert Q&A on Outsourcing Fiduciary Investment Responsibilities" (Practical Law, February 2014), Groom Law attorneys David N. Levine and Allison Tumilty explain the legal dimensions of outsourcing fiduciary investment responsibilities and the advantages and disadvantages of passing the baton for certain delegated tasks. They add that outsourcing "can be appropriate for defined benefit and defined contribution plans of all sizes."
From my perch as a forensic economist who is sometimes hired to give expert testimony, I have observed a larger number of cases being filed that address the relationship between plan sponsor and service provider. Whether that trend continues remains to be seen. Given the foregoing, the ERISA Advisory Council inquiry is likely to be both timely and informative.