As the rules governing retirement and health plans grow more
complex, employers often need professional help in order to keep up
with the day-to-day management of the employee benefit plans they
sponsor. From third-party administrators and financial advisers
hired to manage the operations and investments of 401(k) plans to
administrative service organizations and pharmacy benefit managers
engaged to process health care and prescription drug claims,
employers increasingly outsource the administration of their
While many vendors' contracts make it clear that they are
not acting in a fiduciary capacity with respect to an
employer’s plans, other providers may take on all or nearly
all of the fiduciary liability for the administrative services they
provide. Agreeing to take on that responsibility may serve as a
selling point, setting these vendors apart from their more
When a vendor agrees to assume all or part of the
employer’s fiduciary responsibility for the maintenance of
the employer's benefits plans, the employer may believe it is
no longer responsible for those plans. Unfortunately, that is not
the case. Not all fiduciary obligations can be avoided via the
terms of a vendor contract. To avoid potentially expensive
surprises when engaging such vendors, employers must, therefore,
understand the scope of their fiduciary obligations.
Fiduciary Duties Under ERISA. Under the
Employee Retirement Income Security Act of 1974 (ERISA), a
"fiduciary" is a person (either an individual or an
entity) that exercises discretionary authority or control over an
employee benefit plan’s administration or assets. Employers
are fiduciaries of the plans that they sponsor for the benefit of
ERISA imposes various duties on fiduciaries. Chief among them is
the requirement that fiduciaries administer their plans prudently,
acting in the best interests of plan participants and beneficiaries
and with the exclusive purpose of providing them with benefits. To
do so, an employer may need expertise in a variety of areas —
the selection of investments, plan administration and legal
requirements, etc. If the employer does not have that expertise
in-house, it will need to engage outside vendors or service
providers to assist in carrying out these duties.
Selection and Monitoring of Service Providers.
The initial selection of a service provider is a fiduciary action.
So, when hiring outside professionals, the employer must
The reasonableness of compensation to
be paid to the provider (when compared to the services to be
provided, and to the fees charged by other providers)
The provider’s experience,
quality, and ability to provide the requested services
The provider’s business
practices and procedures
Any other facts necessary to assess
the provider’s competence and value
If a vendor will not agree to assume fiduciary liability for its
services to a plan, the employer will retain fiduciary liability
for any errors or failures the vendor causes. (The vendor may,
however, be contractually obligated to indemnify the employer for
any losses.) As a result, the employer will need to monitor the
vendor’s performance on an ongoing basis.
Even if a service provider agrees to assume fiduciary liability
for its provision of services, the employer is not being released
from its fiduciary duty to monitor the provider. Accordingly,
employers should establish a regular review process to
appropriately monitor providers. As part of that process, the
Provide a timely review of any
notices or reports regarding the provider’s performance,
issues related to the plan, possible changes to the
provider’s fees, etc.
Periodically check the fees the
provider charges to ensure they match the fees stated in the
Understand the provider’s
administrative practices and procedures, as well as any changes to
Investigate any participant concerns
or complaints to ensure they are resolved, and, if possible, insist
the provider change its practices and procedures to avoid future
Hiring an outside vendor to administer their employee benefit
plans or to provide specialized services to those plans may give
employers a false sense of security that they have satisfied their
own fiduciary obligations with respect to the plans. To avoid
future fiduciary surprises, however, employers must monitor the
performance of all of their service providers, regardless
of the level of fiduciary liability those providers agree to
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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