401(k) Plan Sponsor Fiduciary Considerations Regarding Non-Fiduciary Service Providers

Recent court decisions have identified issues that 401(k) plan fiduciaries need to consider to ensure the prudent and most efficient form of plan management. It is critical that fiduciaries have the requisite skills and knowledge to review and understand these issues.

Relying on any party with a conflict of interest can result in ERISA violations and significant monetary sanctions. Plan sponsors must practice prudence and insulate themselves from a new wave of ERISA lawsuits and regulatory oversight.

Many plan sponsors have relied upon non-fiduciary service providers for investment selection and fiduciary guidance in the absence of a fiduciary overlay or a discretionary vendor. But plan fiduciaries should never rely on a non-fiduciary service provider with potential conflicts of interest and self-dealing to accept responsibility for their service model and investment fund recommendations.

  • It is not prudent to replace funds to create additional revenue sharing if the change in fund selection provides no reasonable investment advantage to plan participants.
  • It is not prudent to maintain an investment policy statement without adhering to its guidelines in relation to fund replacements and the payment of plan fees with revenue sharing.
  • It is not prudent to use an asset-based fee arrangement to pay for plan administration services if fees increase and no additional services are provided to the plan.

Plan participants have standing to sue plan sponsors to recover losses in their individual 401(k) plan accounts caused by a breach of employer fiduciary duty under ERISA. There will be more claims against 401(k) plan fiduciaries who previously considered themselves immune based upon offering a broad selection of investment alternatives.

The allocation of responsibility between a plan sponsor and a service provider should be stated in the service agreement. Most agreements limit liability to intentional errors or gross negligence and further limit damage amounts. The service agreement should address whether or not the non-fiduciary service provider is willing to indemnify or defend the plan sponsor in participant litigation where the service provider is at fault.

We are a strong fiduciary partner providing plan sponsors with open-architecture solutions that lower costs and facilitate the identification of best-in-class service models and best-performing fund line-ups. We uncover embedded fees, conflicts of interest, service incapabilities, and contract limitations inherent in the retirement plan solutions offered by non-fiduciary service providers (i.e., brokerage firms, insurance companies, mutual fund companies, trust companies, payroll service companies, and third-party plan administration firms).