Outsourcing Fiduciary Liability for Trustees in Retirement Plans

Running a business requires employers to wear many different hats. Sometimes, it’s easier to outsource time-consuming administrative tasks. Employers who sponsor their employees’ retirement plans take on not only the specialized work involved but also a fair amount of legal risk. Should businesses fail to comply with ever-evolving IRS regulations, they could be held liable and charged with fees.  

Along with reducing the hassle of the day-to-day, outsourcing retirement plan responsibility to a fiduciary decreases the liability burden on employers. This article will provide insight into the fiduciary role as it pertains to retirement plans, explain the liabilities each fiduciary type takes on, and list the benefits of outsourcing fiduciary liability away from sponsors and towards a trusted financial advisor or financial platform. 

Fiduciary standards of conduct 

To understand the role of fiduciaries in shouldering liability for retirement plan trustees, it’s important to see the issue from the perspective of the financial advisor. The Employee Retirement Income Security Act of 1974 (ERISA) designates four primary standards of conduct for all financial advisors to follow in the role of fiduciary:

• The Exclusive Benefit Rule
  
  This rule stipulates that fiduciaries must always act in the interest of their plan’s participants and beneficiaries. Fiduciaries must operate with the single purpose of providing benefits to these parties. In addition, they should only pay necessary and reasonable expenses for administering the plan. These guidelines protect beneficiaries from the possibility of fiduciaries acting under false pretenses in offering liability protection. 

• The Prudent Person Rule
  
  This rule ensures that financial advisors overseeing an important account – like a retirement fund – will only make investment choices that reflect the care and diligence of the beneficiary who owns the account. The advisor may only add to the portfolio if it is a reasonable asset builder or if it has a likelihood of turning a profit. The Prudent Persons Rule protects beneficiaries from harm to their financial assets from less reliable investments, such as penny stocks. 

• Diversification
  
  Financial advisors have the role of minimizing the risk of large investment losses. They mitigate this risk by diversifying their trustees’ investment choices. 

• Maintaining Plan Documents
  
  Running a retirement account involves many important plan documents as issued by the IRS. The fiduciary must comply with ERISA standards by maintaining these documents. 

By adhering to these guidelines, fiduciaries not only abide by legal parameters – they uphold their quality of service towards retirement plan sponsors. 

Codes and liabilities 

Financial advisors who operate as fiduciaries are designated by legal codes. Each code type defines the role of the fiduciary in retirement plan management – and how much liability they can be expected to take on. 

3(16): Plan Administrators – 3(16) fiduciaries are involved solely in the functional, planning aspects of managing a retirement account. They are hired to take on the administrative tasks that employers find time-consuming and demanding, given their busy schedules. 3(16)s carry out a set list of tasks rather than advising plan sponsors on the affairs of the retirement plan itself. The fiduciary risk associated with the tasks is also transferred in part to the plan administrator. 

3(21): Investment Advisors – 3(21) fiduciaries share the liability burden and recommend plan investments to their sponsors. Some investment advisors meet directly with clients to recommend assets to add to their portfolios. While they are responsible for providing sound advice within ERISA guidelines, only the sponsor makes changes to the investment itself.  

3(38): Investment Managers – Finally, 3(38) fiduciaries offer the same advisory services as investment advisors, with the added benefit of authorizing direct changes to retirement plan funding. These changes must meet an acceptable standard predetermined in collaboration with the investment sponsor. 3(38)s also hold some fiduciary responsibility. 

It is important to note that while each type of fiduciary removes a different amount of liability from the employer or trustee, these sponsors are always at least somewhat liable for failure to comply with IRS regulations. Nevertheless, having an advisor to collaborate with greatly increases the likelihood that these regulations will be adhered to. 

Reliable outsourcing options   

Financial firms understand the weight of the fiduciary role – and know to avoid practices that can be considered breaches of fiduciary responsibility. For example, firms are familiar with the different indirect payment options (a.k.a. revenue sharing practices) that have the potential to cause conflicts of interest for plan sponsors — sub-transfer agency fees, shareholder servicing fees, and more. Reliable fiduciary firms evaluate cases of revenue sharing in line with ERISA’s codes of conduct. 

In addition, financial advisors and platforms take on the burden of complex financial duties, such as acquiring foreign tax credits for applicable employees. As a whole, employers can meet the many demands of their careers while simultaneously reducing liability risk by outsourcing fiduciary roles to financial firms with years of experience behind them.  

A trustworthy fiduciary partner 

If you’re seeking to mitigate the fiduciary liability of managing your employees’ retirement plans, Chesapeake Growth Network is ready to help:

• Our financial advisors sign on to your accounts as a 3(21), fully-independent fiduciary – a partnership that results in reduced fiduciary risk and outsourced liability for that risk. 
• To assure that our services create confidence and stable growth year-round, we mandate an annual retirement plan review and create growth benchmarks for each beneficiary. 
• As an in-demand firm, we maintain an extensive network of providers and can connect employers to resources that help foster retirement plan growth. 

Chesapeake Growth Network fosters retirement plan success on behalf of our sponsors, taking the weight off their shoulders to allow for a focused business growth pipeline. Contact us through our website to speak to a representative about our fiduciary services.  

In our next article, we’ll provide insight on how business owners and individual investors can easily navigate estate planning documents – including the Last Will and Testament, the Revocable Living Trust, and more – to secure the future of their loved ones and associates.

Securities offered through Triad Advisors Member FINRA/SIPC; Investment Advisory Services offered through Continuum Advisory, LLC., an Independent Registered Investment Advisor. Continuum Advisory, LLC and Kelly Financial Advisors, LLC are not affiliated with Triad Advisors.