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Delegation for Plan Sponsors (Part 2)

Sponsors never need worry about somehow "losing control" of their plan.

W. Scott Simon, 05/07/2009

In last month's column, I noted that sponsors of qualified retirement plans such as 401(k) plans can delegate their day-to-day administrative and investment fiduciary responsibilities (and associated liabilities) to others. This has been allowed by the Employee Retirement Income Security Act since its inception in 1974.

As I also noted in last month's column, the law of ERISA has always provided that qualified retirement plans such as 401(k) plans should ideally be run by professional fiduciaries, not by plan sponsor executives with little (or no) experience (much less time or interest) in such matters. Many sections of ERISA that grant fiduciary delegating authority, in fact, attest to this, as does case law.

Plan sponsors that choose to delegate their responsibilities and liabilities to a professional named fiduciary can, in effect, get out of the retirement plan business and be free to concentrate fully on their business so they can stay in business during these troubled times instead of worrying about fiduciary risks they are neither prepared nor trained to manage. Sponsors never need worry about somehow "losing control" of their plan, since ERISA requires them to always retain the residual fiduciary responsibility to ensure that those to whom they have delegated authority are--and remain--prudent delegatees. In short, plan sponsors always have the power to "pull the plug" on such delegatees.

Delegation of Duties Involving a Menu of Investment Options
I have discussed in a number of these columns over the years how plan sponsors can, in accordance with the provisions of ERISA section 3(38), delegate their duties to select, monitor and (if necessary) replace a plan's investment options to a bank, registered investment advisor or insurance company. The off-loading of such fiduciary duties from the shoulders of plan sponsor executives and their transfer onto the shoulders of such entities is significant and provides immense value to such executives.

Yet this kind of delegation is rarely undertaken because the non-fiduciary business model followed by so much of America's retirement plan industry doesn't provide for plan sponsors to become informed about it. If plan sponsors were informed fully about the option of making such a valuable delegation, then the vast number of those participating in the industry--not fiduciaries in any way, shape, or form--might have to change their business model and actually become fiduciaries.

Since that won't happen (short of government fiat), these non-fiduciaries are content to sit back and whisper sweet nothings to plan sponsors, something like: we will be glad to provide you with "tools" (from a "toolbox!") and "products" and "information" to "help" and "assist" you manage your 401(k) plan. The problem is that this kind of soothing marketing copy ("Come to papa, I'll take care of everything for you") has consequences and those consequences play out in the underlying message of the legal documents that actually govern retirement plans ("Yeah, we'll help you pick mutual fund options for your plan until the cows come home but the sole fiduciary responsibility for doing so still rests with you, Jack, and we'll make clear in any ensuing litigation in which plan participants sue both of us that you're entirely on your own in facing them").

Delegation of Duties Involving a Specific Investment Option
Distinct from the ERISA section 3(38) situation that I've just described, where a plan sponsor delegates selection and monitoring of a plan's entire menu of investment options to, say, a registered investment advisor, is the situation where a plan sponsor (typically a large company) delegates responsibility and liability for a particular plan investment option. For example, the U.S. First Circuit Court of Appeals in the recent case of Bunch v. W.R. Grace & Co. affirmed that the conduct of the named independent fiduciary appointed by the plan sponsor to determine whether the company's stock should be retained in the company 401(k) plan "unquestionably" met the prudent man standard set forth in ERISA section 404(a).

What's most important for our discussion, though, is the court's finding that the company's conduct in delegating duties to a named independent fiduciary was "eminently correct." The company had a conflict of interest whether it retained or sold the company stock given its dual roles as employer (with fiduciary duties to company stockholders) and plan sponsor (with fiduciary duties to plan participants). The solution devised by the company, and blessed by the court, was to appoint a named independent fiduciary to make that hold/sell decision which allowed the company to legally wall off itself from liability for such decision.

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