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In a related article we discussed the ERISA Advisory Council’s (EAC) recommendations on Facilitating Lifetime Plan Participation. In this article we very briefly review and evaluate its findings and recommendations with respect to Outsourcing Employee Benefit Plan Services. (We recently discussed outsourcing issues in detail in our article Outsourcing of defined contribution plan fiduciary function.)
Generally, the EAC found that:
Outsourcing of functions traditionally exercised by the plan sponsor was an emerging trend.
There is confusion over the extent to which fiduciary responsibility/liability can be transferred from the sponsor to the outsourcing provider. Key areas of confusion: Is naming the named fiduciary a fiduciary act? If fiduciary responsibility is outsourced, what is the extent of sponsor co-fiduciary liability? Is the appointment of an outsourcing provider to perform a (non-fiduciary) ‘ministerial’ function a fiduciary act?
There is a need for comprehensive, clarifying guidance on the fiduciary standards for selecting and monitoring an outsourcing provider. In the EAC’s view, key factors here include: “(1) financial soundness; (2) expertise; (3) training; (4) business model; (5) registration and licensing, where applicable; and (6) reputation.”
Multiple-employer plans may function for sponsors as outsourcing arrangements.
There is ‘considerable confusion’ about how ERISA bonding rules apply to outsourcing arrangements.
To improve outsourcing practice, the EAC recommended:
Educating sponsors on current practice, including the options available and contracting practices.
Clarifying ERISA fiduciary rules with respect to the outsourcing transaction – what responsibility/liability can be delegated, what is retained and what is the scope of sponsor co-fiduciary liability?
Guidance on sponsor fiduciary ‘select and monitor’ duties, including ‘questions to ask’ and best practices and identifying and dealing with conflicts.
“Publish[ing] clear examination and enforcement priorities and follow[ing] up with publication of relevant examination findings.”
Encouraging the use of multiple-employer plans, including developing “rules or safe harbors for multiple-employer plan sponsors and adopting employers that would minimize liability from acts of non-compliant adopting employers.”
Clarifying and updating ERISA bonding requirements as they apply to outsourcing transactions.
We considered many of these issues in our related article. The EAC’s recommendations, if acted on, would significantly improve current outsourcing practice, mainly by clarifying what the ERISA rules are. That clarification would make outsourcing contracting – allocating liability between the sponsor and the outsourcing provider – much easier and effective.
In our view, the key issues are: (1) Can the sponsor fully delegate away named fiduciary responsibilities, with no residual ‘select and monitor’ responsibility/liability? And (2), if it cannot, what is the extent of those retained responsibilities/liabilities? Some bright-line guidance on those issues would be immensely helpful.
In our view, however, guidance on those issues is unlikely any time in the near future. The extent of the sponsor’s duty to select and monitor, for instance, fund managers and fund menu options, has been a contentious issue in litigation, with DOL sometimes taking an aggressive position and with the courts not always agreeing with DOL’s position. These issues may only be ‘clarified’ via litigation.