Using Fiduciary Oversight to Grow Recordkeeper Relationships
Most of us understand that a retirement plan sponsor’s fiduciary duty to participants and beneficiaries is an important factor in running a plan. In fact, the fiduciary duty is the highest standard of care in U.S. law. It requires plan fiduciaries to elevate participants’ interests above their own. And the consequences of breaching a fiduciary duty can be significant, including personal liability to restore any plan losses that result from a breach. But fulfilling fiduciary duties—and avoiding liability—is not all that difficult if plan sponsors and service providers are equipped with the proper tools and the right relationships.
Avoiding Fiduciary Liability—For Recordkeepers
Fiduciary duty, liability, and compliance, when it comes to retirement plans, could fill up countless pages to cover adequately. So for our purposes here, let’s focus on one subset of providers that could be affected by fiduciary compliance rules: recordkeepers. Historically, recordkeepers and other third party service providers have avoided fiduciary liability by carefully limiting their services and contractual obligations—or the way they perform them. For example, a service contract may explicitly state that the provider will not exercise any discretion in performing certain tasks but will rely on the plan sponsor’s direction exclusively. Although a written agreement not to exercise discretion does not guarantee that this will happen, at least it may document the parties’ intentions. And this may be helpful in a later dispute.
Is There a Better Way?
But rather than avoiding fiduciary liability by limiting services to those that involve only “ministerial” duties, might recordkeepers take a different approach—one that still insulates them from harm but that also provides more of what plan sponsors need? The short, easy answer is yes, they can.
One way that recordkeepers can provide better service without taking on additional liability is to join forces with another service provider that specializes in plan administration and compliance. The Employee Retirement Income Security Act of 1974 (ERISA) allows plan administrators (employers) to delegate nearly all of their retirement plan responsibilities to a prudently selected third party who agrees to assume those responsibilities. These entities are often referred to as “ERISA 3(16) fiduciaries,” named for the section in the U.S. Code that addresses a plan administrator’s duties. ERISA 3(16) fiduciaries (or 3(16) administrators) can perform nearly all the functions that employers normally must fulfill, thus freeing them to run their businesses rather than getting bogged down with day-to-day plan operations.
Recordkeepers that partner with experienced 3(16) fiduciaries no longer have to explain to plan sponsors why they cannot perform certain tasks. Rather, they have access to a complete administrative solution that they can discuss with their plan sponsor clients. So here’s the good news for recordkeepers who take this alternative approach: they don’t assume any more fiduciary liability than before. They still get to perform the nonfiduciary functions that they have always done. But now they have a partner who is willing to assume fiduciary responsibility. Now they can help lift the plan sponsor’s administrative burdens by connecting them with a retirement compliance expert whose entire business is focused on making plan sponsors’ lives easier.
Pentegra—Your 3(16) Fiduciary Partner
Pentegra has spent over 80 years honing its retirement plan fiduciary and compliance skills. We know retirement plans. We know what plan sponsors need to do—and we do most of it for them. And we know how to work hand-in-glove with recordkeepers to keep them out of harm’s way. We free up plan sponsors to run their businesses, absolutely. But we also free up recordkeepers to keep doing what they do best: providing nonfiduciary ministerial services without accidentally assuming fiduciary responsibility. Contact a Pentegra expert at solutions@pentegra.com to learn more.