401(k) Service Providers

The Plan Administrator’s responsibilities include the oversight of the plan’s Covered Service Providers (CSPs), which may include:

• Defining the scope of any Service Providers duties and responsibilities;
• Screening and selecting Covered Service Providers;
• Monitoring their activities;
• Completing performance assessments; and
• Benchmarking and filing a report with the Plan Administrator, the Trustee, or the Named Fiduciary whereby observations and any recommended course of action are presented for consideration.

An important aspect of these fiduciary duties and responsibilities include understanding when a fiduciary, or Co-Fiduciary relationship exists between the plan and the Covered Service Provider and whether this “status” is intended or an unintended consequence.

Types of Service Providers

Service Providers that are frequently called upon to provide services to the plan include the following:

Investment Manager (Fiduciary Role)

• Under ERISA, assuming the plan document permits, the management of investment decisions can be delegated to a Section 3(38) Investment Manager.
• The investment manager is authorized to manage, acquire or dispose of plan assets. The investment manager must acknowledge in writing this fiduciary responsibility.
• This service can be performed by any person who maintains the appropriate license to provide such services, including a Registered Investment Advisory business entity.

Investment Adviser (Fiduciary Role)

• A Section 3(21) Non-Discretionary Fiduciary is more than likely to be considered to be an Investment Adviser.
• Generally stated, providing any investment advice for a fee creates a specific investment advisor fiduciary role.
• In April 2016, the Department of Labor (“DOL”) issued new regulations that would dramatically impact how a plan’s investment advisor(s) must handle plan participants and their beneficiaries when providing investment advice involving the transfer, investment, rollover, or distribution of participant accounts.
• The new regulations, collectively, are often referred to as “The Fiduciary Rule.” Presently, the status of the Fiduciary Rule is unclear.  See our blog for the latest updates.

Participant Investment Adviser (Fiduciary Role)

• A Plan Sponsor may elect to offer participants access to a participant investment adviser, also referred to as a participant investment adviser.
• The Pension Protection Act of 2006 provides greater protections for plan sponsors who retain participant investment advisors who comply with the rules, which deal chiefly with the way they are compensated.
  • Specifically, if the adviser is receiving “level compensation,” regardless of the investment options recommended to a participant, the adviser does not violate the ERISA conflict-of-interest prohibition.
  • The participant investment adviser needs to acknowledge his or her fiduciary status with respect to the plan.

Custodian (Non-Fiduciary Role)

• The plan’s custodian (also known as a non-directed trustee) typically serves in a non-fiduciary capacity, meaning the custodian does not have discretion concerning the disposition of plan assets.
• The custodian, who is hired by the trustee, holds the investment assets and is responsible for buying and selling investments over time.
• Usually, the custodian handles actual payment of distributions to participants or their beneficiaries, and provides recordkeeping services to help document the plan’s investment, contribution, and withdrawal activity.
• Although the agreement between the custodian and the plan sets out the specific duties and responsibilities expected of the custodian, the plan trustee – a fiduciary – retains, at all times, complete control over what the custodian does, and is ultimately responsible for each of the custodian’s activities.

Third-Party Adminstrator a/k/a Recordkeeper (Non-Fiduciary Role)

• The third-party administrator, often known as the recordkeeper, is typically hired by the plan administrator. As the name suggests, this service provider is responsible for providing many of the non-fiduciary, day-to-day administrative services that are necessary to the operation of the 401(k) plan. These scope of these services is spelled out in the services agreement between the plan administrator and the service provider, and typically include one or more of the following:
  • Maintaining the plan document and all amendments;
  • Preparing, maintaining and distributing the summary plan description (SPD) for the plan;
  • Filing IRS and DOL reporting documents, such as the Form 5500 series;
  • Performing nondiscrimination testing for the plan (either all required tests, or only specific tests, depending on the terms of the service agreement);
  • Preparing and delivering participant statements and required notices to the plan administrator, or directly to plan participants and beneficiaries, depending on the terms of the service agreement;
  • Reconciling and reporting all financial transactions; and
  • Any other non-fiduciary administrative and compliance duties, as set forth in the service agreement.
• It is important to be completely familiar with the terms of each service agreement you have with each service provider.  Many operational errors and misunderstandings can be avoided by each party fully understanding its role, and the nature of services expected to be provided, under the agreements.

Administration and Monitoring

Hiring Service Providers

When hiring any plan service provider, a fiduciary should evaluate a number of prospective vendors, thoroughly documenting the selection process.  One popular way of accomplishing this is by using a questionnaire, which may be prepared by the benefits committee or its advisor (for example, ERISA counsel retained by the benefits committee).

The questionnaire is typically broken down into sections, and asks questions relating to services provided, fees charged, the number of plans the service provider currently is serving, the size of their plans, the type of the plans, and other pertinent data.

Once the completed questionnaires have been received back from several bidding providers, they are often compiled into a chart format, so that the various service provider data can be easily compared.  Not only does this help facilitate the selection process, but it serves as a document that helps illustrate the diligence and care that went into the decision-making process.

Service Provider Agreements

Plan fiduciaries should ensure that their expectations from each service provider, as well as all other provisions, are well-defined within a written, executed services agreement.

Significant terms of such an agreement should include, among other things:

• The scope of the engagement, including the specific nature of all Plan services to be provided;
• The extent to which the CSP acknowleges fiduciary standing with respect to the Plan;
• The specific disclosure of any existing or potential conflicts of interests the CSP may have with respect to the Plan, or any “interested party” connected to the Plan, including any conflicts involving self-dealing; and
• The full disclosure of all direct and indirect compensation received by the CSP in connection with the services to be provided under the services agreement.

On-Going Monitoring

Once hired, the Plan Sponsor or Plan Administrator (or its designated responsible agent) has a continuing fiduciary duty to monitor the performance of the service providers throughout the duration of its contractual term.This includes such tasks as:

• Confirming that an up-to-date, executed copy of a service agreement for each of the Plan’s covered service providers is securely filed for safe-keeping on the premises.
• Confirming that each covered service provider agreement has been properly reviewed by a professional experienced in such matters, such as experienced ERISA legal counsel, as well as internally by appropriate personnel.
• Confirming that each covered service agreement sets forth the compensation arrangement, including both direct and any indirect payments, due from the Plan or Plan Sponsor within the scope of the engagement.
• Affirms the existence of appropriate policies or procedures in place to account for and control expenses, whether associated with plan investments or administration expenses.