As a 401k Plan Sponsor, You Have a Fiduciary Obligation to Monitor the Activities of Providers


It was almost a year ago that we announced QPSteno, a service that monitors and aggregates retirement plan service provider activities. In that 12 months, I have heard varying reactions. People have told me how great the idea is (“Finally, something to show me exactly what people are doing and what they get paid.”) and people have told me that I am crazy. Recently, I had someone tell me that unless I could provide him with documentation explicitly saying that he is required to monitor the activities of his service providers I could go pound salt.

Well, here it is: straight from the Department of Labor- the reason a Fiduciary has an obligation to monitor the activities of the service providers.

“It is the view of the Department (of Labor) that compliance with the duty to monitor necessitates proper documentation of the activities that are subject to monitoring.” (29 CFR 2509.08-2)

First, let us establish a couple of assumptions. The first assumption is that you have outsourced some of the operations of the plan. You have either hired a broker, a TPA, a recordkeeper, or a fiduciary of some variation. You are paying one or all of those parties with assets from the plan. As outlined in the Employee Retirement Income Security Act (ERISA), using plan assets to pay service providers is a prohibited transaction. There are exemptions to that transaction so long as we have determined that the services are necessary for the operation of the plan and the fees are reasonable for the services provided. In order to insure that the services are required and the fees are reasonable, there is a certain level of monitoring required.

Let’s break out the DOL statement into its individual components for better understanding.

Duty to Monitor. We established that plan sponsors who outsource any operation of the plan to a third party and pay with plan assets have a duty to monitor the covered service provider, if for no other reason than to determine that the services are necessary and the fees are reasonable. So according to the Department, the outsourcing of services creates a duty to monitor.

Proper Documentation of Activities. The DOL could have used words like “results” or “output”. But they specifically chose the word activities. It makes sense when you consider what goes into any particular service that is outsourced by the fiduciary. Fund evaluation is not simply printing a report. The report is the culmination of several other job functions. If you read much of ERISA, the term process is used repeatedly. The DOL asks for an Investment Policy Statement (a written process) in its audits. It is clear that the focus is on the prudence of path to get to the destination. In Donovan v. Cunningham, the 5th Circuit Court opined, “[ERISA’s] test of prudence…is one of conduct”. While this case and the quoted Interpretive Bulletin focus on the prudence of the investments, the Court discusses the process, not the result. It should be further considered that the courts consider facts and circumstances when evaluating prudence. It would be difficult to argue a prudent process for a service if you did not have a mechanism to track that the services and associated activities were performed as outlined.

It does not seem that the intent is to have you document every trade of every fund held in your plan as the same Interpretive Bulletin discusses cost benefit analysis of decisions not to proxy vote. Specifically, it is acceptable to forgo proxy voting if the determination is made that cost to prudent do so will outweigh the potential benefits. But the IB explicitly states that the decision and evaluation should be documented. Other services may require close monitoring. For example, many advisors disclose in 408(b)(2) documentation that they provide education to plan participants. If the broker is paid with plan assets through an arrangement like a wrap fee, a responsible plan fiduciary has an obligation to track the activities of that broker as they relate to the service of educating the participant.

In summary, if you outsource any portion of your retirement plan to a third party, you have an obligation to track and document the activities of those parties.