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The plan sponsor must monitor those with whom it has contracts for services, understand the services provided, make sure they are necessary and reasonable, and be certain that all conflicts of interest are disclosed, if any.

How Plan Sponsors Contract for Services

A company sponsoring a qualified retirement plan for the benefit of its employees is generally referred to in the jargon of IRS, Department of Labor, and SEC circles as the “plan sponsor.” As the sponsor of an ERISA qualified plan, many management level executives are ill-equipped and lack any formal training in managing the myriad of responsibilities required by the various laws and regulations under the jurisdiction of any of the three regulators mentioned above.

Plan sponsors are often mentioned in most plan documents as the formal “plan administrator” as well. Under ERISA 3(16), there is no formal checklist or playbook of all the job requirements of a plan administrator; however, almost any plan operational issue becomes the domain of the plan administrator, who mostly contracts these operational issues away to a third party plan administrator.

Plan sponsors generally, depending on their size, form a retirement committee to hold regular meetings, document the process by which investment decisions are made, select and monitor the plan investment menu, and perform additional fiduciary functions as required by SEC and DOL regulations. Many times these committee members seek out professionals trained in fiduciary global standards of excellence to handle these very specific responsibilities.

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The 401(k) plan has evolved over time since the early 1980’s such that with the increased complexity and regulatory burden facing plan sponsors, most all services are outsourced in some capacity to a third party, as mentioned above. Neither the plan retirement investment committee nor the plan sponsor, however, can contract away their ultimate responsibility and liability to make certain the plan is operated in full compliance with all IRS, Department of Labor and ERISA regulations, and SEC or FINRA requirements.

The plan sponsor must monitor those with whom it has contracts for services, understand the services provided, make sure they are necessary and reasonable for the value of services provided for the successful operation of their plan, and be certain that all conflicts of interest are disclosed, if any. The service provider fee disclosure regulations under ERISA 408(b)(2) require it.

Outsourcing Services

Regularly, plan sponsors looking to outsource certain necessary services formally contract specialists, such as:

Third Party Administrators

These professionals generally execute a service agreement describing their services, fees, and responsibilities in performing various compliance functions in the operation of your plan. Their agreements often spell out what they are NOT responsible for, which may mean as plan sponsor, you are still liable for certain administrative functions.

Record Keepers

These are professional firms who provide a platform for the plan investments, a web site for participant daily access, and plan participant record keeping services. They may also custody the plan assets, if a financial institution, or may partner with a third party custodian to hold the assets, at the plan level. Record keepers who provide most services including custody are generally referred to as bundled providers. Those who provide participant record keeping services in conjunction with a third party financial institution are often referred to as unbundled providers.

FINRA Financial Advisers

These professionals often consult and present bundled solutions with a record keeper providing the core services above, however, they may select a plan menu, have the plan sponsor sign off on it, enroll and educate participants, periodically meet with the plan sponsor, etc…for an asset based fee, or other indirect compensation built into the bundled fee charged by the record keeper, or imbedded in the actual investment product itself. These professionals rarely act as fiduciaries under this approach.

SEC Registered Investment Advisors

Plan committees often want to share or outsource most fiduciary liability and hence, seek out professionals who will acknowledge their fiduciary status with the plan in writing, in collaborative form without discretion under ERISA 3(21) or with discretion, as an investment manager, under ERISA 3(38). These professionals will often will often craft the investment policy statement, keep minutes of committee meetings, provide quarterly performance monitoring reports, and make recommendations on selecting, monitoring and replacing investment menu options periodically. In addition, they may oversee the selection and monitoring of a default investment suite of funds under ERISA 404(c)5. Finally, most advisers provide an executive summary at least annually of all fees and expenses, including the application of any revenue sharing payments received from the custodian/record keeper which they receive from the funds on the plan menu.

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