The idea of hiring experts to handle difficult plan responsibilities is nothing new to the 401(k) industry.
What has changed is the variety of outsourcing opportunities offered today, and the number of vendors who will accept roles traditionally held by plan sponsors. More than ever, plan sponsors are seeking to outsource difficult plan responsibilities to outside experts. Creative vendors and plan advisors have responded with an array of fiduciary and administrative services to meet the rising demand.
Few plan sponsors handle plan testing or record-keeping themselves. Likewise, not many employers create their own investment accounts. Historically, outsourcing these basic plan functions to outside specialists is so common that no one even uses the term “outsourcing” to describe them. For decades, it has been far more reliable and cost efficient to hire outside vendors.
The 1990s brought the emergence of Professional Employer Organizations (PEOs) that transfer the burdens of payroll, insurance, benefits, 401(k), and even elements of the employer relationship, to a convenient third-party package. While employers give up some flexibility when joining a PEO, many small employers who lack internal expertise have found this approach to be a cost-efficient way to divest themselves of responsibilities that distract from their core business.
Shortly after the turn of the century, PEOs were required to use ERISA 413(c) multiple-employer plans as their 401(k) plan structure. In these 401(k) plans, participating employers not only outsource most administrative duties to the PEO, they transfer the very role of plan sponsor. A number of industry associations also adopted this multiple-employer plan structure, without the PEO, to expand coverage to their members. Most association plans reduced some of the inherent cost and workload barriers to 401(k) participation.
By 2010 a variation on multiple-employer plans had emerged, commonly called the “open MEP,” which shed the industry or payroll connections among participating employers. In the spring of 2012 a pair of Department of Labor rulings declared that certain responsibilities such as Form 5500 filings and plan audits would remain with the adopting employers in many cases. These rulings reduce the potential cost savings of open MEPs for those employers whose main objective was to eliminate audit costs, but leave intact a substantial amount of the outsourcing of functional responsibilities and fiduciary oversight.
The concept of outsourcing key plan sponsor responsibilities is hardly exclusive to multiple-employer plans. Before the early 2000s the 401(k) industry rarely talked about outsourcing of fiduciary roles, particularly in the small- and micro-plan market where plan sponsors have tended to be relatively unengaged in fiduciary matters. By 2005 the era of the modern 401(k) advisor had arrived, bringing with it a moderate increase in fiduciary awareness by plan sponsors. With increased awareness came the realization by many sponsors that they were ill equipped to fulfill the fiduciary responsibilities required of them. The emergence of these twin factors led to the popularity of establishing a shared fiduciary role by the advisor and plan sponsor under ERISA 3(21)(A). For the first time, down-market plan sponsors were being told that specific fiduciary roles could be shared and/or outsourced to third parties.
This 3(21)(A) fiduciary advisor trend eventually led to a rediscovery of Section 3(38) of ERISA. Written in pre-401(k) days but newly applied to participant-directed 401(k) plans, ERISA Section 3(38) enables a powerful mechanism to formally delegate investment decisions to an independent “investment manager.” Section 405(d)(1) of ERISA states that once an investment manager who meets the requirements defined in ERISA Section 3(38) is appointed, “…no trustee shall be liable for the acts or omissions of such investment manager or managers, or be under an obligation to invest or otherwise manage any assets of the plan which is subject to the management of such investment manager.” In other words, when a plan sponsor appoints and monitors a qualified 3(38) investment manager after a prudent selection process, responsibility for the selection and oversight of the plan’s investments can be outsourced in its entirety.
It should be noted that the specific role of ERISA 3(38) fiduciaries depends on the service contract created with their engagement.
The latest outsourcing trend is the emergence of independent ERISA 3(16) plan administrators. The plan administrator (not to be confused with third-party administrator) is named in the plan document and normally handles operational duties such as government filings, participant disclosures, hiring of service providers, and other responsibilities established in the plan document. The 3(16) role is usually filled by plan sponsors, but they may choose to outsource this responsibility by designating a specific individual or outside fiduciary as plan administrator.
ERISA 3(16) outsourcing has yet to find widespread traction, but the industry is beginning to see it in several forms:
• Multiple-employer plans. When the plan sponsor role is outsourced to an MEP, possibly including a PEO plan, the 3(16) role would normally transfer to the sponsoring entity unless otherwise directed in the plan document.
• Transaction approval. Several vendors are willing to assume delegated responsibility to review and approve loans, hardships, QDROs, and distributions. At least one provider refers to this as a “3(16) fiduciary” role, though it’s unclear if this is stated as such in the plan document.
• MEP look-alike plans. Some of the outsourcing benefits of open multiple-employer plans were effectively eliminated by recent DOL Advisory Opinions, which pushed individual Form 5500 filings and plan audits back on adopting employers. As a result, several popular MEPs have restructured as non-MEP single-plan arrangements that offer a bundle of services designed to retain many of the MEP’s outsourcing and streamlining characteristics. To appeal to the same type of employer that seeks outsourcing through a MEP, these “look-alike” plans may offer ERISA 3(38) investment management packaged with an independent 3(16) plan administrator and other services.
Any advisor actively working with small- and micro-market plans can attest that a number of plan sponsors don’t know they’re fiduciaries, much less grasp the distinctions among the bewildering array of fiduciary services and outsourcing opportunities offered in the marketplace. Most plan sponsors will rely on their advisors to evaluate outsource services, clarify in practical terms what it all means, and recommend those services appropriate to each client’s desired level of involvement.
