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Exposed and Liable - What Do We Do Now?
By: Steven Dufault, CIMA®, Senior Consultant 

Defined Contribution Plans have become a complex maze of rules, regulations and significant fiduciary responsibility. This growing labyrinth is no surprise with Defined Contribution Plans attracting over $6.8 trillion1 of assets and becoming the primary savings vehicle for millions of Americans.  

Recently, there has been an increase in the number of lawsuits brought against Plan Sponsors. Several claims suggest fiduciary breaches related to Plan investments. So what is a Plan Sponsor to do given that a plan fiduciary is held to the highest of standards including adherence to the prudent expert rule. The prudent expert rule requires that a fiduciary must act…
“With the care, skill, prudence, and diligence under the circumstances the prevailing
that a prudent man (person) acting in a like capacity and familiar with such matters
would use in the conduct of an enterprise of a like character and with like aims.”
Since few Plan Sponsors have the budget, time or interest in becoming prudent experts in all areas of plan oversight, it is common to engage third party experts such as an ERISA attorney, auditor, recordkeeper, trustee, custodian and advisor to assist in meeting their obligations under ERISA.  

On the advisor front, investment consulting is generally delivered under the co-fiduciary status of ERISA section 3(21). In this structure, the third party consultant provides a prudent process and makes recommendations directly to the Plan Sponsor. Equipped with this guidance, the Plan Sponsor is now well prepared to make an informed and prudent decision. Under this 3(21) arrangement, the ultimate decision-making authority remains with the Plan Sponsor/company-designated fiduciary and the liability is shared between the Plan Sponsor and consultant. 

While the vast majority of Plan Sponsors are well served by a 3(21) investment consulting relationship, there are circumstances in which a Plan Sponsor may choose to outsource the investment-related decisions for a Plan. Potential reasons for outsourcing include:
  • Increasing burden on Committee
  • Growing burden on staff
  • Lack of internal resources
  • Lack of investment expertise
  • Want to defray, transfer fiduciary liability
  • Implement decisions faster
  • Improved risk management
  • Fee monitoring and benchmarking
  • Desire for strategic partnership
  • Custom core investments
  • Custom target date funds
Investment outsourcing is delivered under ERISA section 3(38) in which the consultant assumes full discretion over the investment-related decisions for the Plan. In this situation, the consultant is considered an investment manager and is fully responsible for establishing and implementing a thorough fiduciary process related to the Plan’s investment options. In a 3(38) arrangement, the Plan Sponsor transfers liability to the discretionary consultant but retains fiduciary responsibility for selecting and monitoring the consultant. 
Outsourced 3(38) services may include:
  • Creating and maintaining the Investment Policy Statement
  • Investment manager due diligence
  • Selecting specific investment managers
  • Choosing the Plan's Qualified Default Investment Alternative (QDIA)
  • Transition management
  • Document oversight
  • Ongoing monitoring or investment options
  • Determining manager replacements, as necessary
  • Fee benchmarking and negotiation
A Plan Sponsor’s fiduciary responsibility and liability has not necessarily changed, however, the environment has become more complex.

If you are interested in learning more about the co-fiduciary 3(21) or discretionary 3(38) services available at DiMeo Schneider & Associates, L.L.C. we are happy to discuss further to determine what is right for you and your Plan.
1. Investment Company Institute; March 31, 2015
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