This blog is the first in a series of three exploring advisor independence in managed account services and the role of a retirement plan fiduciary. Pressure to leverage existing client relationships to increase revenues has put independence and objectivity at great peril. Against that backdrop, this complete guide for plan sponsors focuses on how advisors and consultants, in the spirit of profits and pure survival, often abandon independence and their fiduciary obligations.
While many plans have multiple fiduciaries, all plans covered by ERISA are required to have at least one fiduciary. The term “fiduciary” is perhaps the most common buzzword in financial services. But because what it means to be a fiduciary necessarily depends on context and function, not to mention a complex interplay of statutory interpretation, regulations, and case law, the term can defy easy definition.
Technically, there is a definition under ERISA Section 3(21), which includes any person who:
- Exercises any discretionary authority or control respecting management of the plan or exercises any authority or control respecting management or disposition of its assets;
- Renders investment advice for a fee or other compensation or has any authority or responsibility to do so (i.e., the investment advisor generally); or
- Has any discretionary authority or discretionary responsibility in the administration of such a plan.
Common fiduciaries include but are not limited to: trustees, members of the investment committee, investment advisors, investment managers, and plan administrators. But fiduciary status is a functional test based on the service or action performed. Whether someone is a fiduciary under ERISA does not hinge on titles.
Role of Plan Sponsors
At a minimum, plan sponsor obligations fit into five broad responsibilities:
- Acting solely in the financial interest of plan participants and their beneficiaries
- Carrying out their duties prudently
- Following the plan documents (unless inconsistent with ERISA)
- Diversifying plan investments
- Paying only reasonable plan expenses.[i]
When a plan sponsor lacks the expertise to carry out their obligations, they are allowed, and even encouraged, to hire experts. Many plan sponsors look to advisors and consultants to assist with many responsibilities, such as investment-related duties.
Because hiring a service provider is a fiduciary function,[ii] plan sponsors must make such hires prudently.[iii] Plan sponsors must review the disclosures from service providers both initially and on an ongoing basis. Such disclosures should include the outside professional’s services, fees, fiduciary status, and any conflicts of interest.[iv]
The DOL has made clear that the selection and monitoring of service providers requires a determination of any “conflicts of interest that may impact the service provider’s performance.”[v] According to the DOL, fiduciaries should also consider:
- “financial condition and experience with retirement plans of similar size and complexity;
- Information about the quality of the firm’s services: the identity, experience, and qualifications of professionals who will be handling the plan’s account; any recent litigation or enforcement action that has been taken against the firm; and the firm’s experience or performance record;
- A description of business practices: how plan assets will be invested if the firm will manage plan investments or how participant investment directions will be handled; and whether the firm has fiduciary liability insurance.”[vi]
Role of Advisors and Consultants
Though it might already seem apparent, the role of advisors and consultants is to perform those services agreed upon in the agreement between the plan sponsor and the advisor or consultant and to ensure they avoid any conflicts. Specifically, this might include recommending investments to plan sponsors in either a discretionary or non-discretionary capacity. For example, the advisor or consultant typically recommends the funds that comprise the designated investment alternatives (DIAs) and the qualified default investment alternatives (QDIA). Over time, the advisor or consultant will monitor these investments and make recommendations when necessary. Such services are fiduciary services under Section 3(21) of ERISA.
Advisors and consultants may also provide non-fiduciary services to plan sponsors to assist them in meeting their other fiduciary obligations. These services can be expansive but may include services such as assisting with selecting and monitoring of recordkeepers, assisting with fiduciary governance, coordination of investment committee meetings including preparation of agendas, and distribution of minutes. Another area where advisors and consultants lend support may be with participants and beneficiaries. This service can also be in either a fiduciary capacity, where the advisor makes investment recommendations, or in a non-fiduciary capacity – solely providing education.
Selling products and services to plan sponsors and participants is clearly distinguishable from all of the services of a fiduciary advisor or consultant. Selling products and services can take many different forms but is always fraught with conflicts. For example, a plan advisor currently serving the plan as a non-discretionary advisor under ERISA Section 3(21) may charge an additional fee to upsell a plan sponsor to a new discretionary investment management service under ERISA Section 3(38). While there is nothing problematic about an advisor serving as a 3(38), there can be confusion about whether the advisor is “advising” a client in their fiduciary role or selling separate services. Another common example is the fiduciary advisor to the retirement plan that sells a discretionary managed account service. While acting in the best interest of the plan, the fiduciary advisor recommends adding a solution that will pay the advisor increased fees for performing the additional service. Though many advisors have justified these additional products and services in making the recommendation, the conflicts remain – particularly when plan sponsors dig deeper to understand what’s driving the decision to offer and promote the services.
In fulfilling the obligation to prudently select and monitor service providers, it may be helpful for plan sponsors to understand the advisor’s common services – as well as those services that are distinguishable – so that conflicts of interest that may impact the service provider’s performance aren’t present.
The role of plan sponsors is expansive and grows every day as new legislation, litigation, and regulation emerge. The role of advisors and consultants can be difficult to define, but it is crucial to understand what these roles are to ensure client needs are being met in an appropriate manner. For more information on advisor independence and the role of a retirement plan fiduciary, follow along with the rest of the blogs in this series, or download our full guide here.
Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Multnomah Group does not provide legal or tax advice. Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.
[i] DOL, Meeting your Fiduciary Responsibilities, available at: https://www.dol.gov/sites/dolgov/files/ebsa/about-ebsa/our-activities/resource-center/publications/meeting-your-fiduciary-responsibilities.pdf.
[ii] See Meeting your Fiduciary Responsibilities, available at: https://www.dol.gov/sites/dolgov/files/ebsa/about-ebsa/our-activities/resource-center/publications/meeting-your-fiduciary-responsibilities.pdf, at page 5.
[iii] See Understanding Fiduciary Duty: Hiring a Service Provider, available at https://www.multnomahgroup.com/webinar-recording-hiring-a-service-provider.
[iv] Id. at page 5.