3 tips to guide an employer's search for a retirement plan advisor

A growing number of retirement plan sponsors are recognizing the value of retaining a qualified plan advisor and have accordingly launched a search.

In fact, one annual survey of plan sponsors found that 38 percent of respondents were looking, which is the largest percentage since the report started. Two of the biggest concerns? Managing fiduciary responsibilities and addressing the risk of litigation and liability. Further, the advisor’s willingness to take on a formal fiduciary role was critical to 60 percent of respondents.

Related: 3 things to consider when forming a retirement plan committee

It takes the right plan advisor to help be a safeguard for responsible plan management that adheres to the plan’s documented rules. A well-performing plan is no guarantee against risks. Fundamental blocking and tackling requirements need to be met. Plus, there potential ongoing traps to avoid under Internal Revenue Service (IRS) and Department of Labor (DOL) rules. The right fiduciary advisory partner is an important protection.

There are three important areas to explore as part of your due diligence:

1. The implications of the fiduciary’s role.

Every retirement plan has a named Plan Sponsor. This typically is the employer (and its owners, directors, and board members) or a committee. As Plan Sponsor, the company establishes plan definitions. The Plan Sponsor also has discretionary control regarding the plan’s management and is the authority for the management or disposition of plan assets.

Under ERISA (and in most states for non-ERISA plans), the Plan Sponsor has specific duties with regard to the plan’s operation. One is to operate the plan for the exclusive benefit of participants and beneficiaries while defraying reasonable expenses. The Plan Sponsor and other fiduciaries have a duty of prudence in managing the plan with the participant’s best interests in mind. Prudent fiduciaries will consider if the assistance of professionals to assist them in carrying out such duties is required. In most cases, advisors will be retained to serve alongside the Plan Sponsor in carrying out these duties.

2. How fiduciary advisory services align with your needs.

In deciding to obtain the services of outside service providers, the plan sponsor should determine the type and scope of services required. Services vary from firm to firm, but tend to fall into three categories:

• As related to the investment selections, the advisor or consultant may serve in a 3(21) capacity in giving recommendations to the plan sponsor to sign off on. But in this instance, the plan sponsor has the final say over investment options and also assumes the fiduciary risks.
• If the advisor consultant operates in a 3(38) capacity, the advisor makes decisions over investment options and assumes responsibility for them. In this instance, it is importantly that the plan sponsor meets its responsibilities in making sure the 3(38) advisor is qualified and is fulfilling his or her duties.
• The third type of plan fiduciary relates to plan sponsor functions, such as making sure contributions are submitted in a timely fashion, that the plan document is being followed and the 5500 report is filed, etc. These fiduciary responsibilities are sometimes referred to as 3(16) duties. Since these responsibilities are administrative in nature, they are usually outsourced through a record-keeper or third-party administrator.

3. What to look for in terms of roles, processes, track records, fees and more.

In addition to assessing what types of advisory services meet your plan’s needs, a plan sponsor should establish what fiduciary roles the candidates will actually assume. Generally, advisors need specific experience and credentials in order to serve as an investment fiduciary. Being a fiduciary may not be within the scope of their employment. Plan sponsors should inspect prospective advisors’ processes, experience and expertise before making any decisions. Fee structures should also be reviewed and understood clearly.

A person may become a fiduciary to a plan by performing fiduciary functions. In these cases, it is incumbent on the Plan Sponsor Administrator to determine whether the functional fiduciary is indeed a fiduciary and should make appropriate adjustments to the scope of authority granted to such a person.

Sponsoring an employee retirement plan can be a complicated and risky business. Sharing the fiduciary risk with a qualified advisory partner might make a lot of sense.

Read more: 

• Higher ed institutions use plan advisors to boost retirement results
• Sponsors demanding much more from plan advisors
• Why plan sponsors shouldn’t forget about retirement plans during open enrollment

Tim Thurston is a manager of Retirement Plan Consulting Services for Hub International.