Choosing Wisely: How Advisors Can Evaluate and Select a Third-Party Fiduciary Services Provider

As regulatory oversight continues to evolve, retirement plan advisors face growing pressure to ensure their plans’ fund lineups and fiduciary processes can withstand scrutiny. With more complex investment options and heightened attention from regulators and litigators alike, many advisors are increasingly recommending their plans seek support from third-party fiduciary service providers to help manage risk and fulfill their responsibilities. 

But not all fiduciary services providers are created equal. Some bring prudence, structure, documentation, and sound investment selection methodologies to the table. But there are others that will approve just about any fund under the guise of being “easy to work with” or “flexible.” While this might sound attractive, it may signal the lack of a truly diligent process. Which is why you select a third-party provider in the first place, right? 

Find out what to look for in a third-party fiduciary services provider, including questions you should be asking when evaluating one.  

Third-party fiduciary services providers can bring tremendous value to a retirement plan—offering investment expertise, documentation, and oversight that help plan sponsors meet their fiduciary duties and reduce exposure to risk. They do this by taking on some (or all) of the responsibility for building and maintaining an investment lineup.  

Depending on the service model, that responsibility can look different. To illustrate this, consider how 3(21) and 3(38) support may compare to responsibilities on a road trip. A 3(21) fiduciary acts as a navigator, offering guidance and recommendations but leaving the driving—or final decisions—up to the plan. Meanwhile, a 3(38) fiduciary takes the wheel, making discretionary investment decisions on the plan’s behalf as they sit in the passenger seat for the duration of the ride. 

In both cases, the plan’s fiduciary burden gets delegated, at least in part, to the provider. But just because that responsibility gets shared—or possibly offloaded—doesn't mean the plan or its advisor can just take it easy.  

The real work begins before you go on that road trip together. Choosing an appropriate fiduciary services provider means digging into their process, evaluating their track record, and making sure they’ll stand up to scrutiny when it comes. 

You may be asking, “But how do we evaluate the quality of a third-party fiduciary services provider?” Fair question. Here’s a quick guide of five questions every advisor or plan sponsor should ask when evaluating your options.

Most fiduciary services providers will refer opaquely to their “fund selection methodology” in their marketing materials without much detail. This is an opportunity for you to speak to them and ask them to explain their process a bit further. Any provider worth their salt should be able to. You’ll want to look for a structured, transparent process that holds up under ERISA’s requirement of “prudence.” Remember, there never will be a black-and-white, “right versus wrong" choice when selecting funds. Yet if the provider can clearly explain their approach and the rationale behind it, this is a good sign that they know what they’re doing. 

As mentioned above, you’re looking for a prudent fund-selection process, not a black-and-white one. A lot of providers make sure to add a level of flexibility in their approaches—especially if they’re serving as a 3(21), so they can incorporate an advisor’s thinking and meet the plan’s objectives. However, beware of overly flexible approaches as well. You don’t want a provider who will approve every fund under the sun. How much fiduciary protection potential does that really offer you? You want to look for a provider that has a rigorous process in place, but enough flexibility to work with an advisor and a plan on a personalized level. 

Fiduciary service providers should be able to justify every investment selection they make with documentation that supports those decisions. Adequate providers will have sample documentation ready for you to review as you’re making the decision to select them. Remember to look for someone who offers clarity and transparency in all areas of their process. 

Ongoing monitoring of funds is just as important as the initial selection process. Funds can go on watch or be determined as unfit for the lineup over time for a variety of reasons. That means it’s important for the fiduciary services provider to have a process in place for monitoring and removing funds when they go on watch or a better alternative becomes available. A provider should be able to clearly explain their process to you. 

When evaluating a fiduciary service provider, it’s crucial to look beyond just their track record. Consider their long-term commitment to the retirement space, the stability of their business, their reputation for responsible oversight, etc. While we don’t know of any third-party fiduciary provider that has yet faced litigation for poor fiduciary practices, differences in experience and credibility still matter. A tenured provider with a strong reputation, deep resources, and a history of prudent decision-making is more likely to stand by their clients if something goes wrong. You want to work with a provider who not only understands the regulatory landscape but also has the financial strength to support you through it. 

As you can see, choosing a third-party fiduciary services provider isn’t simply a box to check. It’s a crucial decision that reflects your clients and you. The provider will shape the investment experience, influence participant outcome, and help determine how well your plan holds up under examination. Now that you know what to look for, you’re in a better position to make that choice. 

When you’re weighing your options, don’t overlook the benefits of going with a provider that has scale and staying power. Larger, more established fiduciaries not only offer years—or even decades—of experience, but they can also bring a robust compliance infrastructure, proven investment processes, responsive support, and research-backed decision-making. All of that can translate to better lineups that improve participant outcomes, as well as stronger defense against potential regulatory scrutiny.  

As the leader in fund data, Morningstar Retirement provides the insights that investment managers rely on to make informed decisions. And because we’re a large, publicly traded company with a strong balance sheet, we offer a level of financial stability that’s hard to match—an important consideration when evaluating whether a fiduciary service provider can truly stand behind their commitments.  

Feel free to reach out directly at Brian.McCarthy@morningstar.com and ask all the questions listed above—plus any others you can think of—to learn more about how our approach can help your fiduciary oversight.